Economic Questions (Calculation Based)

Instruction: You have to work on this assignment mostly based on the class notes, and it is economically calculation based. After take a look on the class notes, then you are good to answer these questions. 

Each question only needs a paragraph or two, 2 questions a page, roughly 4 pages. please answer it by labeling the question numbers. (No repeating the question after the number) 

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Due Dates: 8/21/2019

Background information: 
You were recently hired as a summer intern for the City of Tacoma’s Office of Environmental Policy and Sustainability. As a part of your job application, you included a copy of the report that you prepared for TECON 480, and the hiring manager thought that your expertise in cost-benefit analysis would be a useful addition to the department, as they do not have any economists on staff. The City is in the process of analyzing a new initiative that would entail spending $200 million in 2019 on “green infrastructure”. These projects include investing in charging stations for electric cars, installing solar panels on commercial buildings, improving levees to protect against rises in the sea level, and installing scrubbers on manufacturing plants to reduce emissions. The objective of this initiative is to reduce the impacts of climate change in Pierce County over the next 50 years. The department has prepared a preliminary draft of a report evaluating the impact of this initiative and has asked you to review the report. 

The following 8 questions relate to the scenario outlined above.  

Question 1: The draft report states that one of the benefits of the initiative is that it will create 500 new jobs in Pierce County over the life of the project. If you agree that this impact should be included as a benefit in the analysis, explain how you would quantify and monetize the benefit. If you disagree and do not think that this impact should be included as a benefit, explain why. 

Question 2: Clearly explain how you would define the counterfactual for evaluating the impacts of these projects, assuming that only Pierce County has standing for the analysis. 

Question 3: The draft report estimates that the annual benefits from these investments will be $5 million per year for each of the 50 years for which these infrastructure projects will be in place. Since the total benefits will be $250 million and the initial investment only costs $200 million, the analysis concludes that the net benefits are $50 million and the project should be undertaken. Explain why you agree or disagree with this statement. 

Question 4: Choose one potential assumption for the project, and explain how you would conduct sensitivity analysis. Include a brief explanation as to why this is an important component of cost-benefit analysis. 

Question 5: The draft report mentions that one potential benefit of the project is a reduction in the likelihood of flood damage to homes in areas within 1 mile of the Puyallup River. Without the projects, there is a 25% probability that these homes will be affected by flooding; with the projects, the probability of flood damage is predicted to decrease to 10%. Explain how you could quantify and monetize this benefit. 

Question 6: The report mentions that one of the impacts of the investments would be that the slowed increase in atmospheric temperatures would regulate the local climate of Mt. Rainier and avoid excessive and early melting of the snowcap each year. Provide one example of (i) use value, (ii) option value, and (iii) existence value, associated with this impact. 

Question 7: The report recommends that the projects be undertaken, because the net present value (NPV) of the projects is $482 million. The report also mentions that several potential costs and benefits were not included in this calculation, as it was not possible to quantify and monetize all of the relevant costs and benefits. Should the decision-makers focus exclusively on the impacts that can be monetized, or should the non-quantified impacts be taken into consideration? If so, how could the decision-makers account for the non-quantified impacts? 

Question 8: Due to your impressive work during the summer internship, your supervisor offers you a full-time position at the end of the summer. The position would have a contract for a five year period, paying $75,000 per year for each of the five years. Your other option is to pursue a master’s degree, which would cost $20,000 per year for 2 years. This would be a full-time program, so you would be unable to work during this period. Upon graduation, you expect to be able to obtain a job that would pay $100,000 per year for years 3 to 5. Based entirely on these impacts mentioned and considering only this five year period, should you take the position or should you pursue the master’s program? Assume that your discount rate is 10%.  

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