4. Consider the exploration and development of a 300-million-barrel oil de- posit in two offshore areas. The first deposit is located in the Gulf of Mexico, which has a mild climate and is close to workers and facilities. It would take about one year to complete exploration and 10 years to develop and produce the Gulf of Mex- ico deposit. The second deposit is located in the Bering Sea west of Alaska, which has a severe climate and is far from workers and facilities. It would take about three years to complete exploration and 15 years to develop and produce the Bering Sea deposit. The likelihood of environmental damages from oil development is much higher in the Bering Sea than in the Gulf of Mexico.

a. Does a high discount rate favor oil exploration and development in the Gulf of Mexico or the Bering Sea? Why?

b. Which of the following two procedures is the better way to handle the dif- ferences in potential environmental damages of exploration and develop- ment in the Bering Sea and the Gulf of Mexico: Use a higher discount rate in the Bering Sea evaluation than in the Gulf of Mexico evaluation? Include expected environmental damages in the benefit-cost analysis? Explain.