...kCHAPTER 6 Cost-Benefit Analysis and Government Investments TRUE/FALSE QUESTIONS 1. A cost-effective program mix is one that accomplishes a given mission at minimum cost. 2. Cost-benefit analysis is a technique for determining the net benefits of alternative government projects. F 3. An increase in the profits of gasoline dealers on an improved road is a benefit of the road project. F 4. If increases in agricultural land values are viewed as a benefit of an irrigation project, then the market value of projected increased crops should also be included as a benefit of the project. 5. The social rate of discount must equal the opportunity cost of funds used to finance a project. F 6. If a project has a B/C ratio of 0.9, its approval will result in net benefits to citizens of the nation. F 7. The benefits of widening a road consist only of the cost savings to existing users of the road. 8. If the benefits of a new bridge exceed the costs, then there will be a net social gain from building the bridge. F 9. If the marginal social cost of a new road exceeds its marginal social benefit, then building the road will result in a net social gain. F 10. The higher the social rate of discount, the more government projects for which benefits will exceed costs. T 11. A lower discount rate favors more capital-intensive investments that yield net benefits further into the future. 12. The present value of a stream of net benefits for 20 years will be less than the sum of those benefits...
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...Government and its influence on the allocation of resources and affect on the economy cannot be overlooked, which makes the subject of Public Finance such an important field in the study of economics. Government is made by the people for the people, and therefore government has the power to control resources based on what the people want. Sure, people don’t like to pay taxes. People would rather keep all of their money and spend it in the way that they’d like. However, people also know how important social security, Medicaid, and other governmental programs are to their future, and therefore are willing to pay taxes in exchange for the goods and services the government provides to its citizens. Essentially, it all comes down to an economic comparison between one option (no taxes and no governmental programs) versus another option (taxes and governmental programs), and how much people are willing to pay (money, opportunity costs, etc.) for one option versus another. Because taxation by the government is such an important subject to everyone, Public Finance is truly an important subject that affects everyone and is an important subject for everyone to learn about, since it affects their overall well-being. By know more about voting, government allocation of resources, redistribution programs, and other important topics in Public Finance, people can make better decisions about who to vote for and people can have a bigger say and better knowledge about how the government affects...
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...What is economics? * Economics is the social science concerned with the choices that individuals, businesses, governments, and entire societies make when they cope with scarcity. What is Microeconomics? * Microeconomics is the study of the choices that individuals and businesses make and the way these choices interact and are influenced by governments. The Economic Way of Thinking: * The study of economics encompasses the incentives that influence people’s choices and the arrangements that coordinate them. Economists study the quantities of goods and services sold or offered (SUPPLY) and the relationship of supply to how much people need or want (DEMAND). * Economic way of thinking (EWT) has 3 main components – I Scarcity and choice II Marginal analysis III Incentives I. SCARCITY AND CHOICE: a. Resources are scarce. Human wants exceed the resources available to satisfy them. b. Choices must be made. We must choose among the available alternatives. c. Choice is a tradeoff. There is no free lunch. People make rational choices by comparing costs and benefits. * Benefit: What you gain from something. * Cost: What you give up to get something. Opportunity cost – * The value of the best alternative that you must give up to get something – the value of the best forgone alternative. II. Marginal Analysis: d. Margin: Margin means extra or additional e. A choice...
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...BUSINESS SCHOOL - Undergraduate Assignment Feedback Front sheet SECTION A: |(to be completed by the student) | |Please complete Section A in Block Capitals making sure that you include your Student Number, Module Code and Group Number. FAILURE to| |do so may result in your assignment being delayed. If you are unsure of any of the above please check at the Business School Student | |Centre Reception. | |Student Number (s): |U1320055 | | | | |Programme:(e.g. Business Management) |Business Management | |Module Title: (e.g. Studying for Business) |Public Finance |Seminar Group |00 | |Module Code: |FN6002 |Word Count |1524 | I confirm that no part of this assignment. except where clearly quoted and referenced. has been copied from material belonging to any other person e.g. from a book...
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...fullsocial costs and social benefits of production and consumption. The study of externalities by economists has become extensive in recent years - not least because of concerns about the link between the economy and the environment. PRIVATE AND SOCIAL COSTS Externalities create a divergence between the private and social costs of production. Social cost includes all the costs of production of the output of a particular good or service. We include the third party (external) costs arising, for example, from pollution of the atmosphere. SOCIAL COST = PRIVATE COST + EXTERNALITY For example: - a chemical factory emits wastage as a by-product into nearby rivers and into the atmosphere. This creates negative externalities which impose higher social costs on other firms and consumers. e.g. clean up costs and health costs. Another example of higher social costs comes from the problems caused by traffic congestion in towns, cities and on major roads and motor ways. It is important to note though that the manufacture, purchase and use of private cars can also generate external benefits to society. This why cost-benefit analysis can be useful in measuring and putting some monetary value on both the social costs and benefits of production. MARKET FAILURE AND EXTERNALITIES When negative production externalities exist, marginal social cost > private marginal cost. This is shown in the diagram below where the marginal social cost of production exceeds the private costs faced only...
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...Scarcity: A situation in which unlimited wants exceed the limited resources available to fulfill those wants. Economics: the study of the choices people make to attain their goals, given their scarce resources. Economic model: A simplified version of reality used to analyze real-world economic situations. Market: a group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade. Markets three important ideas:1.people are rational 2.People respond to economic incentives. 3.Optimal decisions are made at the margin. Marginal analysis:Analysis that involves comparing marginal benefits and marginal costs.. Trade-off: the idea that because of scarcity, producing more of one good or service means producing less of another good or service. Opportunity cost: the highest-valued that must be given up to engage in an activity. Three fundamental questions:1. What goods and services will be produced? Consumers, firms, and the government face the problem of scarcity by trading off on good or service for another. 2. How will the goods and services be produced? Firms may need to choose between a production method in the united state that uses fewer workers and more machines and a production method in china that uses more workers and fewer machines. 3. Who will receive the goods and services produced? People are willing to give up some of their income-and, therefore, some of their ability to purchase goods and services- by donating...
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...Marginal Cost Based Pricing in Transport Key Implementation Issues from the Economic Perspective Erik Verhoef, Free University Amsterdam Paper prepared for IMPRINT 1. Introduction Marginal cost pricing in transport is a ‘hot’ topic, in at least two senses. First, as is well known, over the last decade(s), sophisticated pricing policies in transport have evolved from a primarily academic, theoretical construct, to a realistic and seriously considered option for many areas – urban and non-urban – around the world. This is due to (at least) two simultaneous, interacting developments, viz. the steady growth in transport related problems such as congestion and emissions on the one hand, and the development of technologies enabling automated charging on the other. So, marginal cost pricing in transport is ‘hot’ in the sense that many governments, at different spatial levels, seriously explore the possibilities for implementing some form of pricing policies aimed at the containment of transport-induced externalities. At the same time, such proposals are rarely met by great public enthusiasm, making it a ‘hot’ topic from the political viewpoint in that policy makers might easily burn their hands when proposing to drastic pricing reforms in transport. A very common result is that proposals for pricing schemes often end up in the proverbial wastebasket long before a first penny was to be actually charged. Apparently, the implementation of marginal cost based pricing in transport is...
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...related to each week’s objectives. Highlight the correct response, and then refer to the answer key at the end of this Study Guide to check your answers. Use each week’s questions as a self-test at the start of a new week to reflect on the previous week’s concepts. When you come across concepts that you are unfamiliar with, refer to the Student Guide for that particular week. Week One: Fundamentals of Microeconomics Objective: Differentiate between macroeconomics and microeconomics. 1. Macroeconomics is the study of individual choice and how that choice is influenced by economic forces the study of the pricing policies of firms and the purchasing decisions of households the study of aggregate economic relationships an analysis of economic reality that proceeds from the parts to the whole 2. The invisible hand theorem comes from microeconomics macroeconomics sociology political science Objective: Analyze the effect of changes in supply and demand on the equilibrium price and quantity. 3. The law of demand states that the quantity demanded of a good is inversely related to the price of that good. Therefore, as the price of a good goes up, the quantity demanded goes up up, the quantity demanded goes down down, the quantity demanded goes down down, the quantity demanded stays the same 4. Which of the following situations best demonstrates the law of demand? Moviegoers react to an increase in the price of a ticket by seeing fewer movies per...
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...between the existence of externalities and property rights. Section 18.5 discusses public goods and section 18.6 offers a brief discussion of determining the optimal level of the public good to provide. Overall the chapter provides a good solid overview of some very interesting problems. Any instructor who had the time and desire to expand upon the presentation in the chapter could find a wealth of information by consulting an environmental or resource economics textbook. There are an abundance of examples related to pollution or natural resource issues that you could choose to talk about. Check your local newspaper for ideas. The consumption of many goods involves the creation of externalities. Stress the divergence between social and private costs, and the difference between the private (industry competitive) equilibrium and the socially optimal (efficient) equilibrium. You can use the students’ knowledge of consumer and producer surplus to explore the welfare gain of moving to the efficient equilibrium. Exercise (5) presents the classic beekeeper/apple-orchard problem, originally popularized in Meade, “External Economies and Diseconomies in a Competitive Situation,” Economic Journal (March 1952). Empirical research on this example has shown that beekeepers and orchard owners have...
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...situation in which human wants are greater than the capacity of available resources to provide those wants. 3 Parts: 1. People want it 2. There is a limited amount of it 3. It has more than one productive use Scarcity Scarcity vs. Abundance – people see many signs of abundance (e.g. cell phones, iPods) and also see resources wasted daily (e.g. water and food). However, as long as resources are limited and people’s wants are unlimited, scarcity (in the economic sense) will exist. Scarcity In economic reasoning, scarcity is a relative concept, not an absolute one. Scarcity does not mean “not plentiful.” In economics, something is scarce when it has more than one valuable use. = & Opportunity Cost Opportunity cost is what you give up to obtain something else, the second-best alternative. However, what you must give up is not money – it is whatever good or service you would have spent the money on as your next favorite choice. Goods v. Services Good – something that is tangible; it can be seen and felt. It requires scarce resources to produce and it satisfies human wants Goods v. Services Service – something that is intangible; yet it too requires scarce resources to produce and satisfies human wants Is it a good or service? Productive Resources L – land (and stuff from land) L – labor (physical and mental) C – capital (human-made things) E – entrepreneurship Productive Resources ...
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...This aspect of economics deals with the principles of economics that apply to the analysis of the behavior of individual consumers and businesses in the economy. Questions on this exam require test-takers to apply analytical techniques to hypothetical as well as real-world situations and to analyze and evaluate economic decisions. Test-takers are expected to demonstrate an understanding of how free markets work and allocate resources efficiently. They should understand how individual consumers make economic decisions to maximize utility, and how individual firms make decisions to maximize profits. Test-takers must be able to identify the characteristics of the different market structures and analyze the behavior of firms in terms of price and output decisions. They should also be able to evaluate the outcome in each market structure with respect to economic efficiency, identify cases in which private markets fail to allocate resources efficiently, and explain how government intervention fixes or fails to fix the resource allocation problem. It is also important to understand the determination of wages and other input prices in factor markets, and to analyze and evaluate the distribution of income. The examination contains approximately 80 questions to be answered in 90 minutes. Some of these are pretest questions that will not be scored. Property rights and the role of incentives Marginal analysis 55–70% The Nature and Functions of Product Markets 15–20% Supply and Demand • Market...
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...B. Consumers ability to substitute different goods The explanation for the law of demand involves: A. The markets ability to equate supply demand B. Consumers ability to substitute different goods C. The governments ability to set prices D.The suppliers ability to substitute inputs A. A normal good John estimates that with every 20% increase in income, the quantity of grapes purchased rises by 11.2%. From this information one would conclude that grapes are A. A normal good D. Not demanded C. An inferior good D. Luxury Star this term You can study starred terms together Play audio for this term C. Not maximizing revenue since elasticity is less than one and revenue will increase following a price increase when demand is inelastic In California the price elasticity for vanity license plates is .5 and their price is $29. California is: A. Maximizing revenue since elasticity is less then one and revenue will increase following a price increase when demand is inelastic B. Not maximizing revenue since elasticity is less than one and revenue will get decrease following a price increase when demand is inelastic. C. Not maximizing revenue since elasticity is less than one and revenue will increase following a price increase when demand is inelastic D. Maximizing revenue since elasticity is less than one and revenue will decrease following a price increase would demand is inelastic. C. Consumer surplus will decrease and there will be some...
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...ideas associated to individual choices, present two cases of decision-making in which I shall compare the marginal benefits and the marginal costs related with the decision, show what incentives could guide to take a different path, and explain how the principles of economics affect decision-making, interaction, and the gear of the economy as an overall. Individual Decisions R. Glenn Hubbard and Anthony Patrick O’Brien (2010) teaches that “economics is the study of the choices consumers, business managers, and government officials make to attain their goals, given their scarce resources” (pg.4, para 3). Previous citation can translate as: I have only an hour time and I need to choose if to finish my economics paper, or watch my favorite show. Another individual decision example may be when a business has to decide if to produce 5,000 more electric batteries for cars, in the middle of the year, or to stay with the 50,000 production number that was the first decision in the beginning of the year. There are three main economic ideas related to individual choices: “people are rational, people respond to incentives, and optimal decisions are made at the margin” (Hubbard & O’Brien, 2010, pg.4, para 4). Marginal Benefits and Marginal Costs For economists the word margin means additional or extra (Hubbard & O’Brien, 2010). To compare the marginal benefits (MB) and the marginal costs (MC) related with the above personal decision example, I would have to choose between the benefits of...
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...emissions and GHG present a negative externality towards the global environment, yet these GHG emissions are not easily captured or represented in monetary terms. Several Methods have been used to estimate the value of carbon emissions that might arise from capital protects (Comhar. 2008): Marginal Abatement Cost of Carbon (MAC) or Avoidance Cost, and Social Cost of Carbon (SCC) or Damage Cost techniques. The social cost of carbon has been defined as the full effect on social welfare of emitting an extra ton of carbon (as carbon dioxide) at some point in time, over the lifetime of that ton in the atmosphere. The SCC measures the full global cost today of an incremental unit of carbon emitted now to the full global cost of the damage...
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... Answer: It is the social science that studies the production ,distribution and consumption of goods and services and is concerned with the efficient use of scarce resources to achieve the maximum satisfaction of economic wants and needs. Economic wants are many and different. People look for many goods and services to satisfy their wants. Society uses resources to produce goods and services that fulfill these wants. Unfortunately, the resources are not sufficient to satisfy those wants. [1] b) Analyze the THREE interrelated features of the economic perspective? Answer: 1) Scarcity: The first interrelated feature of the economic perspective is the scarcity of resources that forces individuals and society to make decision among alternatives . Human and property resources are scarce, so choices must be made about how best to utilize those little resources. 2) Allocation decision: economics assumes that any decision-making is based on “rational self-interest.” People make rational decisions to achieve the maximum satisfaction of a goal. customers try to get the highest value for their payments. Workers try to get the best job given their skills and abilities. companies try to maximize their profitability. 3) Opportunity cost: economics focuses on marginal analysis when making an economic decision. The marginal or “additional” costs from an economic choice are weighed against the additional benefit. If the marginal benefit outweighs the marginal costs, then a decision will...
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