1.The Department of Natural Resources is planning a program for protecting a wilderness area and has evaluated three options(labelled A, B, and C below) using cost-benefit analysis techniques. Some of the results are presented in the following table:

Option

Total benefits

A) $68 957

B) $63 757

C) $24 325

Total costs

A) $6 272

B) $4 156

C) $3 655

Benefit to cost ratio

A) 11.0

B) 15.3

C) 6.7

Marginal benefit (MB)

A) $5 192

B) $39 440

C) $24 325

Marginal cost (MC)

A) $2 117

B) $500

C) $3 665

MB to MC ratio

A) 2.5

B) 78.8

C) 6.67

The monetary values in the table above are in millions of 2000 Canadian dollars, based on a 20 year life and discounted to present value using a discount rate of 3%. Option A is the strictest standard and Option C is the least strict. Option B is intermediate. The marginal costs and benefit figures refer to incremental costs/benefits involved in moving from no protection to Option C, from Option C to Option B and from Option B to Option A respectively.

a.The department of Natural Resources has selected Option B. Is Option B the economically efficient choice? Explain your answer in detail.

b.Under what circumstances would you recommend Option C ?