Chapter 8

Question 1

Cost-benefit Analysis

Answer 1

The comparison of costs and benefits of public goods projects to decide if they should be undertaken.

Question 2

Cash-flow Accounting

Answer 2

An accounting method that calculates costs solely by adding up what the government pays for inputs to a project, and calculates benefits solely by adding up income or government revenues generated by the project.

Question 3

Opportunity Cost

Answer 3

The social marginal cost of any resource is the value of that resource in its next best use.

Question 4

Rents

Answer 4

Payments to resource deliverers that exceed those necessary to employ the resource.

Question 5

Present Discounted Value (PDV)

Answer 5

A dollar next year is worth 1 + r times less than a dollar now because the dollar could earn r% interest if invested.

Question 6

Social Discount Rate

Answer 6

The appropriate value of r to use in computing PDV for social investments.

Question 7

Contingent Valuation

Answer 7

Asking individuals to value an option they are not now choosing or do not have the opportunity to choose.

Question 8

Revealed Preference

Answer 8

Letting the actions of individuals reveal their valuation.

Question 9

Compensating Differentials

Answer 9

Additional (or reduced) wage payments to workers to compensate them for the negative (or positive) amenities of a job, such as increased risk of mortality (or a nicer office).

Question 10

Cost-effectiveness Analysis

Answer 10

For projects that have unmeasurable benefits, or are viewed as desirable regardless of the level of benefits, we can compute only their costs and choose the most cost-effective project.