Suppose researchers estimate that, in addition to the above effects, there is a 17% probability that this policy will cause the orca population to completely collapse in 50 years. This is an additional cost of the policy.

To place an economic value on this additional cost requires addressing both the uncertainty of the collapse and the fact that the collapse occurs in the future. In the problem below, you will first estimate the cost by calculating the cost if the collapse were certain and happened now. Then we adjust this cost for uncertainty by using the concept of “expected value”. Finally, we adjust this cost for the future by using the concept of “present value”.

1. Expected value: Expected value is like the average outcome. For example, the expected payoff of a $1000 prize that you win with probability 25% is $250. The formula for a single outcome is: EV=(probability)*(prize). What is the expected cost of the lost orcas if the collapse happened immediately? (Hint: multiply the probability and the value)
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3. Present value: The present value (PV) is the equivalent value today of some future value (FV) and it depends on the discount rate according to the formula PV=FV/1+rt . What is the present value of the expected cost of the collapse of the orca population in 50 years if the discount rate is 5% i.e., if r=0.05 ? What if the discount rate is 2%? 7%?

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The expected cost of the lost orcas if the collapse happened immediately wo... View the full answer