CED 201

Introductory Environmental and Resource Economics

Assignment 2 Assigned: 2/26/2016 Due: 3/4/2016

1. For this question, I want you to find a research article in a peer-reviewed economics, environmental economics, ecological economics, or policy journal that uses either revealed preference (e.g., hedonic analysis, travel-cost analysis, etc.) or stated preference (e.g., contingent valuation, conjoint analysis, etc.) as a methodology to value an environmental good or service and use it to answer the following questions (Note: For this question you should type up your results in Word no hand-written assignments will be accepted):

a. Give the full citation for the article authors name(s), article title, journal name, year, volume number, and issue number

b. Describe the research question or hypothesis being tested in the article.

c. Describe the methodology used (I realize that you may not understand all aspects of these papers, but do your best to describe what you think the author(s) are doing in the paper).

d. Describe the key findings: People are willing to pay X dollars for clean water, certain demographics will pay more and others less, the values vary by, etc.

e. Do you believe the values seem accurate? Do you think the research is addressing all of the key factors? Do you think that the method used is a legitimate method for valuing this scenario?

2. The EPA is considering an application from the state of Colorado for a large dam project. The basic costs and benefits of the project (in inflation-adjusted dollar values) are as follows:

Costs:

Construction costs: $700 million/year for the first three years

Operating costs: $50 million/year

Agricultural product lost from flooded lands: $45 million/year

Forest products lost from flooded lands: $20 million/year

Benefits:

Revenues from Power Generation:

Hydropower generated= 4 billion Kilowatt hours/year

Price of electricity= $0.10/Kilowatt hour

Revenues from Irrigation Services

Irrigation water available from the dam= 200K Acre-Feet

Price of water= $500/Acre-Foot

a. Do a formal Cost-Benefit Analysis (CBA) using the quantifiable factors listed above. Assume that the operating lifespan of the dam is 30 years. Assume construction begins in year 1. All other impacts start when the dam is completed (at the beginning of Year 4) and continue for 30 years, which implies the full lifespan for the project is 33 years. Assume that all costs and benefits are paid and received at the end of each year. For this part, do the discounting for the CBA using a 12% interest rate. Do your results indicate a definite yes or no answer for the project?

Here is an example of what your results should look like:

Discount Rate	0.07
End of Year Base (1)	Beginning of Year Base (2)	Annual Values	Present Value (1)	Present Value (2)
1	0	100.00	93.46	100.00
2	1	100.00	87.34	93.46
3	2	100.00	81.63	87.34
4	3	100.00	76.29	81.63
5	4	100.00	71.30	76.29
6	5	100.00	66.63	71.30
7	6	100.00	62.27	66.63
8	7	100.00	58.20	62.27
9	8	100.00	54.39	58.20
10	9	100.00	50.83	54.39
11	10	100.00	47.51	50.83
12	11	100.00	44.40	47.51
13	12	100.00	41.50	44.40
14	13	100.00	38.78	41.50
15	14	100.00	36.24	38.78
16	15	100.00	33.87	36.24
17	16	100.00	31.66	33.87
18	17	100.00	29.59	31.66
19	18	100.00	27.65	29.59
20	19	100.00	25.84	27.65
21	20	100.00	24.15	25.84
			1083.55	1159.40

b. Using the results from part (a.), adjust the interest rate to determine the level of discounting necessary to just break even. (Hint: I would start by changing the interest rate in 1% increments and then refine the changes as you get close to the break-even point.) What does this increase or decrease in interest rate imply about the relationship between costs and benefits over time?

c. (Return to the setup from part (a.) with a 12% discount rate.) In addition to the components of the project listed above, what other costs and/or benefits do you think are missing that should be included? How do you think they will impact the overall conclusion regarding the profitability of the project? (Hint: I would suggest thinking about this in terms of existence values i.e., based on our discussion in class surrounding the development of ANWR what values may need to be built into this analysis and how would you go about getting them. There isnt one right answer you just need to defend your reasoning for what you do come up with. I would suggest starting by thinking about how many households there are in the US and how much each would pay per year to protect the ecosystems associated with the dam.)

d. Finally, holding constant the analysis you did in part (c.) what happens when you increase the acre-foot price of irrigation water from $500 to $1500 and price per kilowatt hour of electricity from $0.10 to $0.13? **need a lot of help with problem 2***