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Questions and Answers
Which of the following types of costs and benefits can be directly associated with a project?
What is an example of an indirect benefit from a project?
What complicates the process of conducting a cost-benefit analysis?
Which of the following is categorized as a social cost of a project?
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How can intangible benefits of a project be described?
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What is a primary challenge when projecting future costs and benefits?
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Which of the following is NOT a characteristic of direct costs?
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Which type of analysis would best encompass both tangible and intangible aspects of a project?
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What was the total estimated damage to the ecology caused by the Exxon Valdez oil spill according to the study commissioned by the state and federal governments?
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Which factor is NOT mentioned as influencing property value in the regression model discussed?
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What does the acronym NIMBY stand for in the context of public projects?
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Which outcome is likely to decrease property values according to the causal regression model discussed?
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What action did the U.S. government take in 1991 to protect the spotted owl?
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What type of model is often used to estimate future property value losses or gains?
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How does an increase in travel time likely affect property prices according to the model discussed?
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What broader societal conflict does the NIMBY phenomenon represent?
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What does a regression coefficient of $5,000 for noise imply about property value?
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How is the total loss of property value estimated due to airport construction?
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What kind of knowledge asymmetry exists between gainers and losers of public projects?
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What are property owners likely to do regarding the estimates of loss from increased noise?
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What is a challenge faced by analysts when inferring the value of nonmarketable items?
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What is one potential emotional cost associated with public projects like building a freeway?
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What might powerful interest groups do in relation to public projects?
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Which of the following is true regarding the estimates related to noise and pollution?
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What is one likely benefit of high-occupancy vehicle lanes mentioned in the report?
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Why is it suggested that time saved in commuting should not be valued in monetary terms?
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What environmental benefit can be considered when calculating the impact of high-occupancy vehicle lanes?
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What is a challenge with valuing nonmarketable items?
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What does present value analysis relate to in project valuation?
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In the television commercial example, what is the promised benefit of saving money monthly?
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Which of the following best describes the effect of inflation on future values?
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What should an analyst do regarding the intangible effects of a proposed project?
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What happens if there is no time preference regarding receiving money?
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What is the present value formula used for comparing projects?
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What must be considered when choosing between project A and project B?
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With a 15 percent discount rate, how much must be earned next year to prefer it over $10 today?
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Why are the net benefits in the 0th year not discounted?
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If the time preference is nil, which statement is true?
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What is the net benefit from project A compared to project B?
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What might influence the decision to choose project A over project B despite project A's higher net benefit?
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Study Notes
Costs and Benefits of Alternatives
- When evaluating project alternatives, a comprehensive list of costs and benefits should be made.
- Costs and benefits can be categorized as direct and indirect:
- Direct: Costs and benefits directly associated with the project.
- Indirect: Costs and benefits that affect the surrounding community but not directly reflected in the project's finances.
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Externalities are indirect costs and benefits that may arise from a project:
- Indirect benefits: Economic growth generated in surrounding areas.
- Indirect costs: Negative factors like increased traffic, pollution, or crime.
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Intangible costs and benefits are not easily quantifiable in monetary terms.
- Intangible benefits: Enhanced city pride and improved community attitudes.
- Intangible costs: Environmental hazards and negative impacts on community well-being.
Estimation and Valuation
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Difficulties in Cost-benefit analysis:
- Many costs and benefits are not measurable in monetary terms.
- Future costs and benefits need to be estimated.
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Valuation of intangible costs and benefits:
- Often controversial and challenging.
- Non-marketable items can have high societal values (e.g., ecological damage, threatened species).
Measuring Future Loss or Gain
- NIMBY (Not In My Backyard) Factor: Local communities may oppose projects with widespread indirect benefits but specific costs to their area.
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Estimating Property Value Loss:
- Causal regression models can be used to estimate the impact of project-related factors (noise, pollution) on property values.
- Regression Model: Price = f(Noise, Pollution, Travel Time, Other Factors)
- Coefficients in the model estimate the impact of each factor on property prices.
- Example: A one-unit increase in noise level (decibels) might decrease property value by $5,000.
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Data Asymmetry:
- Often, potential losers of a project have more knowledge and concern about their losses than potential gainers.
- Organized groups can effectively oppose projects even if they benefit society overall.
Introduction of Time: Present Value Analysis
- Time Preference: The value placed on receiving benefits sooner rather than later.
- Discount Rate: Used to adjust future benefits and costs to their present values.
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Present Value (PV) Formula:
- Calculates the current worth of future benefits and costs.
- PV=∑t=0n(Bt−Ct)(1+r)tPV = \sum_{t=0}^n \frac{(B_t - C_t)}{(1+r)^t}PV=∑t=0n(1+r)t(Bt−Ct)
- Where:
- PV: Present value of the project
- B: Benefit at time t
- C: Cost at time t
- r: Discount rate
- n: Number of time periods
- Where:
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Projects with Different Time Frames:
- Projects with larger benefits in the future may be less desirable than projects with smaller but immediate benefits, depending on the discount rate.
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Zero Discount Rate:
- Implies no time preference.
- Future benefits and costs are not discounted.
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Valuing Non-marketable Items:
- Difficult and can lead to controversy.
- Consider qualitative effects when valuation is difficult.
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Time Saved:
- Difficult to value in monetary terms, as time saved may not translate to increased working hours.
- Can be estimated by considering factors like fuel savings and environmental benefits.
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Intangible Effects:
- Report accurately to inform political decision makers.
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Description
Explore the intricacies of cost-benefit analysis in evaluating project alternatives. Understand the distinctions between direct and indirect costs, as well as tangible and intangible factors that can influence project success. This quiz will help deepen your knowledge in assessing externalities and their overall impact on community well-being.