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32 Cards in this Set

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  • Back
Making time adjustments
-Benefits and costs must be adjusted to account for how their values change over time

Assessing relative values
-Benefits and costs must be systematically compared
Two major steps that follow the estimation of environmental benefits and costs:
Time Adjustments
The purpose of these types of adjustments are:
-Benefits and costs do not accrue to society at the same time
-Benefits and costs often accrue in the future
Present value determination
-accounts for the opportunity cost of money

Inflation correction
-accounts for changes in the general price level
The Two types of time adjustments:
Present Value Determination
Discounts a future value (FV) into its present value (PV) by accounting for the opportunity
cost of money (its highest valued alternative use, which is the rate of return (r) on
Present Value Determination
Explains why money loaned in the present must be paid back in the future with interest
Present Value Determination
Further explains why the present value of monies received in the future is discounted
Present Value
_____ _____ determination is the means by which future environmental benefits and costs are adjusted
Discount Factor
[1/(1 + r)t] is the ____ _____

-r is the discount rate
-t is the number of time periods
Present Value(PV)
_____ ______= FV[1/(1 + r)t]
Social Discount Rate
Discount rate used for public policy initiatives based on the social opportunity cost of funds
Inflation Correction
Adjusting for movements in the general price level
Inflation Correction
The two things listed below are examples of what?

-Convert a real variable today to its future nominal value to account for expected inflation

-Converting a nominal value to its real value
Converts a nominal value into it's real value
-Present value of benefits (PVB)

-Present value of costs (PVC)
These two things are used in Deriving Time-Adjusted Benefits
and Costs:
Present value of benefits (PVB)
is the time adjusted magnitude of incremental benefits associated with an environmental policy change
Present value of benefits (PVB)
_____= S(bt/(1+rs)t)

where bt represents real benefits
Present value of costs (PVC)
the time adjusted magnitude of incremental costs associated with an environmental policy change
Present value of costs (PVC)

where ct represents real costs
Step 1: Determine if an option is feasible
Step 2: Select from among feasible options
Two steps in the Environmental Benefit-Cost Analysis
Use the benefit-cost ratio
If PVB/PVC > 1 then option is ________.
Use the present value of net benefits(PVNB), which equals (PVB – PVC)
If PVNB > 0 then option is _______.
allocative efficiency
To achieve ______ ________
Maximize PVNB = S(bt-ct)/(1+rs)t for all t periods, among all feasible alternatives
To achieve ____-_________
Minimize PVC = S(ct/(1+rs)t) for all t periods, among all feasible alternatives that achieve a predetermined benefit level
Measurement Problems
Estimation is particularly problematic due to
Implicit costs

Equity Issues
Distribution of benefits and costs may be
highly skewed
Reservations About the Use of
Benefit-Cost Analysis include:(2 things)
Reagan’s Executive Order 12291
Explicitly called for maximizing net benefits
(allocative efficiency) and choosing the least-cost alternative (cost-effectiveness)
Regulatory Impact Analysis (RIA)
A requirement under executive order 12291 that called for information about the potential benefits and costs of a major federal regulation
Reagan’s Executive Order 12291
Applicable to any “major rule,” i.e., a regulation expected to have an annual impact of at least $100 million
Clinton’s Executive Order 12866
Explicitly refers to adopting/proposing regulations for which benefits justify costs(allocative efficiency) and designing regulations in most cost-effective manner
Clinton’s Executive Order 12866
Applicable to any “significant regulatory actions,” including those expected to have an
annual impact of at least $100 million
Economic Analysis (EA)
A requirement under Executive order 12866 and executive order 13258 that calls for information on the benefits and costs of a significant regulatory action
Bush’s Executive Order 13258
-Makes only minor amendments to Clinton’s Executive Order 12866
-Extends the use of economic criteria in policy design and evaluation through an Economic
Regulatory Impact Analysis (RIA)
This kind of analysis was used on Lead In Gasoline and produced the following results:

-Estimated incremental benefits included health effects and nonhealth effects, such as increased fuel economy

-Estimated incremental costs were estimated using an engineering cost model of the
refinery industry

-The resulting PVNB over the 1985 - 1992 period (excluding blood pressure effects) was estimated to be $5.9 billion ($1983)and supported the proposed new lead standard