Cost-benefit analyses have been conducted of six proposed projects. None of thes
ID: 2492811 • Letter: C
Question
Cost-benefit analyses have been conducted of six proposed projects. None of these projects are mutually exclusive and the agency has a sufficient budget to fund those that will make society better off. The findings from the CBAs are summarized here in millions of dollars:
Net Social
Benefits
Net Group I
Benefits
Net Group II
Benefits
Group I consists of households with annual incomes over $15,000, while Group II consists of households with annual incomes under $15,000.
a) According to the net benefit rule, which of these projects should be funded?
b) For which of the projects might distributional considerations be an issue?
c) Compute internal distributional weights for the six projects.
d) Recompute social net benefits for the six projects using a distributional weight of 1 for Group I and a distributional weight of 2 for Group II.
Net Social
Benefits
Net Group I
Benefits
Net Group II
Benefits
Project A $2 $2 $0 Project B 6 8 -2 Project C 4 12 -8 Project D -1 -3 2 Project E -2 -1 -1 Project F -2 4 -6Explanation / Answer
Answer for question no.a:
According to the net benefit rule the projects to be funded are to be taken up only when the net benefits are positive. Hence, for project A,B, C are to be taken up.
Answer for question no.b:
Distributional considerations would be an issue for Group I and Group II where ever the results for one group are with positive benefits and the other with negative benefits. Hence, distributional consideratoins would be an issue with projects B,C, D and F
Answer for questions no.c:
For computation of Distribution weights, projects with positive results is to be given a weight of 1 and then the other project witht the negatiive results is to be expressed in terms of the weights of the projects with positive results.
I.e. Net Benefits of Group from with positive results divided by the benefits of the group with negative results.
So, for project B, internal weights are computed by dividing the benefits =8/2 =4
Similary for othe projects and the results are tabulated as below:
Answer for question no.d:
Benefits Net Social benefits Net Group I benefits Net Group II Internal weights Project A $2 $2 $0 NA Project B 6 8 -2 4.00 Project C 4 12 -8 1.50 Project D -1 -3 2 0.67 Project E -2 -1 -1 NA Project F -2 4 -6 0.67