Jeopardy

1. Jeopardy Choose a category. You will be given the answer. You must give the correct question. Click to begin.

2. Choose a point value. Choose a point value. Click here for Final Jeopardy

3. Fundamentals NPV and Alternatives Costs Benefits 1 Benefits 2 Renewables 10 Point 10 Point 10 Point 10 Point 10 Point 10 Point 20 Points 20 Points 20 Points 20 Points 20 Points 20 Points 30 Points 30 Points 30 Points 30 Points 30 Points 30 Points 40 Points 40 Points 40 Points 40 Points 40 Points 40 Points 50 Points 50 Points 50 Points 50 Points 50 Points 50 Points

4. The approximate efficient level of production & consumption on the graph below and the efficiency criterion you used:

5. What is 5 and MB=MC? Marginal Benefits Marginal Costs Total Benefits Net Benefits Total Costs

6. The definition of Pareto Criterion The definition of Kaldor-Hicks Criterion The one that is more useful as a criterion public policy

7. a. Pareto Criterion: A policy change is an improvement if at least some people are made better off and no one is made worse off b. Kaldor-Hicks Criterion: world is made better off overall (welfare improvement) if size of gains and size of losses are such that gainers could fully compensate losers and still be better off (“potential Pareto Improvement” c. Kaldor-Hicks is more useful There are virtually always losers, someone is inevitably made worse off Remember: Kaldor-Hicks Criterion is a necessary condition for satisfying the strict Pareto Criterion

8. This type of bias arises in models if a variable that is correlated both with the dependent and (at least one of the) independent variables, is not included in the model.

9. Omitted Variable Bias Wrong Functional Form: When functional form is incorrect, e.g. an interaction term is incorrectly omitted, then the inference will be biased. Errors in variables bias: measurement error of variable Sample Selection Bias: FDR election projection example. Collect sample in a way that avoids sample selection. Construct models for the excluded variable. Simultaneous Causality Bias: e.g supply and demand. A regression of quantity againgst price won’t be very informative as the two simultaneously influence each other.

10. The future value of $1 today, at future time t, with discount rate r

11. FV=(1+r)t • Recall: This is called compounding • Discounting: PV= FV/(1+r)t • we use compounding and discounting so we can compare value of goods across time periods. Otherwise we are comparing apples and oranges. • Not the same as real vs. nominal

12. Can choice of discount rate affect the public policy decision and how?

13. Yes When there is a difference in spread between fixed costs and operating costs between projects: Ex. Project 1: very High fixed costs, very low operation costs Project 2: Low fixed costs, and high operating costs Low discount rate: prefers project 1 High discount rate: prefers project 2

14. Cost-Benefit Ratio equation and criteria project choice.

15. B/C Discounted present value of benefits divided by discounted present value of costs Project admissible if B/C>1 Project preferred if it has greatest B/C ratio

16. NPV Criteria and Equation

17. NPV= sum( (Bt-Ct)/(1+r)t) Admissable if NPV positive Project with Greatest NPV preferred

18. Does B/C analysis lead to an efficient result? Why or Why not?

19. Does not always pass Kaldor-Hicks test Scale is ignored: not taking into account different sizes of projects Can be manipulated by shifting benefits to costs or vice versa- particularly important with externalities

20. Definition Social discount rate and why its different from the private rate of return.

21. SDR: relative valuation placed by society on future consumption that is presently sacrificed • Aggregation of individual consumption rates of interest • Different because: • Concern for future generations may not be reflected in private market • However remember, political time horizon may be shorter, and individuals may be concerned about future generations • Paternalism: people systematically discount future excessively: myopic

22. 3 out of 7 choices/issues for conducting NPV analysis

23. 5. Consider Real Costs and Real Benefits • Correct concept of real costs a. Opportunity cost is what matters (e.g. value of land whether purchased or condemned) b. Do not include transfers (e.g. taxes, turnpike tolls) — only real resource costs (capital & labor) • Correct concept of real benefits a. Total WTP/WTA for relevant goods or services (area under demand curve) b. Cost of an alternative is just that — a cost, not a benefit (c/e does not imply b>c) — LATER c. Not just financial benefits, but all true benefits 6. Uncertainty 7. Broader Issues: Necessary and Sufficient Conditions? 1. Defining the Limits of the Analysis • Geographically • Temporally • Primary, secondary impacts 2. Jobs • Generally, labor belongs on the cost side (“tie one hand behind their backs”) • Politicians typically view job-creation as a “benefit”of public projects 3. Beware of Double-Counting • Example of agricultural irrigation project: a. Present value of increased stream of net revenue from farming b. Increased value of land 4. Comparing Projects of Different Lengths (in Time) Two methods (identical results): 1. Replicate shorter project; re-calculate 2. Equivalent Annual Net Benefit (later)

24. Definition Economic Cost

25. The economic cost of an activity is the value of whatever must be given up for the activity (opportunity cost) • Opportunity cost typically exceeds monetary outlays • Transfers between members of society, such as taxes paid by firms or individuals to governments, should not be counted as costs • Any social deadweight loss from taxation and any labor costs to collect and process taxes, however, should be counted

26. Economic Concept for gauging consumer and firm response to regulation

27. Elasticity Elasticity =percent change in quantity for 1% change in price, holding all other variables constant - if quantity very responsive to price then elastic, if not very resonponsive than inelastic

28. Name and Definition 3 out of 5 Components of Regulatory costs

29. 1. Real Resource Compliance Costs • Purchase, installation, operation, and maintenance costs of control technologies • Costs of changes in production inputs and processes • Costs of time spent preparing permit applications, reports, etc. • 2. Government Regulatory Costs • Costs of administering, monitoring, and enforcing regulation • 3. Social Welfare Costs • Losses in consumer and producer surplus due to increase in price or decrease in output of goods and services 4. Transitional Costs • Costs of reallocating resources due to regulation 5. Indirect Costs • Costs of changes in market structure, such as increased market power • Costs of changes in product quality • Forgone benefits of discouraged investment • REMEMBER: Depending on relative importance types of costs will dictate which method cost analysis is appropraite

30. Name and definition all 3 Cost estimation Methods

31. 1. Direct Compliance Cost Method • Sum up compliance costs obtained from engineering estimates, and multiply by quantity, then possibly add government administrative costs • Assumes no behavioral response • Least expensive method of cost analysis • May be appropriate when elasticities (behavioral responses) are small or compliance costs (and price increases) are small 2. Partial Equilibrium Analysis • Look at effects on supply and demand in affected market • Incorporates behavioral responses • But assumes that effects of regulation are confined to one market or a few • Cose= decrease in CS+PS • 3. General Equilibrium Analysis [probably necessary for power sector regs] • Look at effects on all sectors of economy • Complex and expensive, but may be necessary if regulating a key industry • Two principal approaches: input / output (I/O) models and computable general equilibrium (CGE) models

32. Area indicating Partial Equilibrium Cost of change below: Price C S1 S0 D F B D A Quantity

33. ABDF Price C S1 S0 D P1 F P0 B D A Quantity Q1 Q0

34. Definition WTP and WTA

35. Measures for Environmental “Goods” Marginal Willingness to Pay (MWTP) = Demand=MB Measures for Environmental “Bads” Marginal Willingness to Accept (MWTA) Total WTP is area under MWTP - aggregate of WTP is total benefit

36. Initial objective most benefit estimation methods in environmental policy domain

37. Estimate of relevant demand function RECALL Demand function = MB = MWTP

38. Names of 3 out of 4 types of methods used to estimate demand (WTP/WTA) for environmental goods and services

39. REVEALED PREFERENCE METHODS • use peoples observed behavior in markets to infer their WTP for environmental goods • Prefered by economists b/c reliable • STATED PREFERENCE METHODS: design surveys • EXPERIMENTAL METHODS: constructed market, choice real, context artificial • OFFICIAL REFERRENDA: constru ted market, works provided using tax; limited application Criteria choice: accuracy (Bias), precision (variance)

40. Name at least 4 problems that may arise from the use of a Recreation Demand Model

41. - Omitted Variable Bias. Income, or education = systematically overestimate - Substitute Sites. lead to a biased estimate of CS for the site in question, if the travel cost to visit a substitute site was correlated with the travel cost to visit the lake. - Trip length. Variability likely to cause a lot of variance, although there could also be some bias. - User Value. The travel cost method only captures user value, and cannot be used to infer option or existence value. This could cause a downward bias on the estimate of CS. - Non-Users. The simplest model assumes non-visitors have zero valuation for the site. Below some threshold level of WTP, some individuals do not show up; thus, ->"truncation bias" arises. - Multiple purpose trips. The "travel cost" is therefore potentially confounded. - Congestion effects. When more people are using the site you yourself may derive less benefits from fishing, and therefore your opportunity cost could be higher than what we've measured.

42. Name an Advantage and Disadvantage of Contingent valuation, Hotelling-Clawson-Knetch Method, Hedonic Property Method, Hedonic Wage Method and an example of when each could be used

43. Answer on Chart

44. Since MWTP is difficult measure can we use avoided cost? What is avoided Cost?

45. Avoided-cost measure of benefits: attempt to use cost of an alternative means of achieving the same objective as a measure of the benefit of achieving the objective: proxy benefits NOT A SUBSTITUTE FOR MWTP: not a measure of benefits at all, all project will pass such a test Cost effectiveness analysis is not economic efficiency

46. Definition Hedonic Methods

47. Hedonics- price of a conventional good varies as quantity of closely related environmental good changes • Use information on attributes to explain variations in price • -Wage determinants include worker characteristics and job characteristics • Housing Determinants include attributes of structure, neighborhood, and environment • Steps: • Estimate Hedonic price function by regressing price on attributes • Estimated Coefficients are the marginal WTP for respective attributes

48. Name & definition all components Benefits

49. 1. Use Value: value from using the good or service, directly or indirectly Non-Use Value • 2. Existence Value • The value to society of knowing that an environmental resource exists • 3. Option Value • The value to society of having an option to use an env. resource

50. Define the model and Name major problem each: Averting Behavior Methods, Societal Revealed Preference, Cost-Of Illness Method