Topic5.1

Question 1

What is the main purpose of Cost-Benefit Analysis (CBA)?

Answer 1

CBA is used for the social appraisal of investment projects, aiming to address and correct market failures while considering environmental impacts.

Question 2

What is the formula for Net Present Value (NPV)?

Answer 2

NPV = ∑ (B_t - C_t) / (1 + r)^t

for t = 0 to T, where B = Benefits, C = Costs, r = Discount rate, t = Time index.

Question 3

What are the steps in a Cost-Benefit Analysis?

Answer 3

• Clear specification of projects/policies
• Quantitative determination of inputs/outputs
• Ascertain social costs/benefits
• Choose a discount rate
• Calculate NPV

Question 4

What is the Compensation Principle in CBA?

Answer 4

If prospective gainers could compensate prospective losers, a policy should be implemented (e.g., when NPV > 0).

Question 5

What are some problems in CBA?

Answer 5

• Measuring costs/benefits
• Choice of discount rate
• Dealing with uncertainty
• Distribution and fairness considerations
• Ethical issues

Question 6

What is the purpose of discounting in CBA?

Answer 6

To weigh future costs and benefits appropriately, reflecting time preferences and opportunity costs.

Question 7

What is the Contingent Valuation (CV) method?

Answer 7

A direct preference method where people are surveyed about their willingness to pay for hypothetical scenarios of environmental goods.

Question 8

What are the types of environmental benefits?

Answer 8

• Use values (e.g., timber, carbon sequestration)
• Non-use values (e.g., existence value, bequest value)
• Option values (e.g., WTP for future use)

Question 9

What is the Travel Cost Method?

Answer 9

An indirect preference method measuring environmental benefit through travel costs incurred by visitors (e.g., to a clean beach).

Question 10

What is the Hedonic Pricing Method?

Answer 10

It values environmental factors by analysing how they affect market prices, e.g., house prices influenced by noise or air quality.