COST-BENEFIT ANALYSIS ECON CLASS

Reference - Boardman et al., Cost-benefit Analysis: Concepts and Practice. 4th Ed.

Exercise 5: Individual and Aggregate Option Price A large rural county is considering establishing a medical transport unit that would use helicopters to fly emergency medical cases to hospitals. Analysts have attempted to estimatethe benets from establishing the unit in two ways. First, they surveyed a random sample of residents to nd out how much they would be willing to pay each year for the unit. Based on responses from the sample, the analysts estimated a total willingness to pay of $8.5 million per year. Second, the analysts estimated the dollar value of the improvements in health outcomes and avoided medical costs of users of the unit to be $5.2 million per year. Taking the analysts' estimates at face value, specify the following: {a} The aggregate of individuals' annual option prices for the unit. {b) The annual total expected gain in social surplus from use of the unit. {c} The annual aggregate option value for the unit. Exercise 6: Numerical methods Imagine that a rancher would have an income of $80,000 if his county remains free from a cattle parasite but only $50,000 if the county is exposed to the parasite. Further imagine that a county program to limit the impact of exposure to the parasite would reduce his income to $76,000 if the county remains free of the parasite but increase it to $70,000 if the county is exposed to the parasite. Assume that there is a 50 percent chance of exposure to the parasite and that the rancher's utility is the natural logarithm of his income.What is the rancher's option price for the county program? (Set up the appropriate equation and solve through iterative guessing.)