Question [4] Q.4 There are a number of methods to monetise environmental cost and benefits, such as: The effects on production methods Preventative expenditure and replacement cost Human Capital Hedonic Methods Travel Cost Methods Contingent Valuation (a) For each method discuss when they are appropriate and how they are applied: (27 marks) A dyke is proposed to be constructed for river protection of a city against flooding. The higher the dyke, the greater the costs and the lower the risk of flooding. Estimated data are indicated in the following table: Height of dyke (m) 3 Cost of dyke ( millions) 25 Risk of flooding 2 (number of times per year) 4 40 1 5 6 7 65 100 150 0.5 0.1 0.05 (b) The damage by flooding is estimated at 10m each time it occurs. Which design height should be selected if the cost of capital is 10 percent. Assume that the dyke once constructed would be everlasting. (6.33 marks) Total (33.33] marks 5% Present Value Table Present value of 1 in *w* years at discount rate, r. Discount rate (1) Years (n) 1% 2% 4% 6% 8% 9% 10% 1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 4 0.961 0.924 0.888 0.855 0.823 0792 0.763 0.735 0.708 0.683 5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 1 N 3 4 5 6 6 7 8 7 0.942 0.933 0.923 0.914 0.905 0.888 0.871 0.853 0.837 0.820 0.837 0.790 0.746 0.813 0.760 0.711 0.789 0.731 0.677 0.766 0.703 0.645 0.744 0.676 0.614 0.705 0.666 0.630 0.596 0.564 0.665 0.623 0.583 0.547 0.513 0.627 0.582 0.540 0.502 0.467 0.592 0.544 0.500 0.460 0.424 0.558 0.508 0.463 0.422 0.386 8 9 10 10 11 11 12 0.896 0.887 0.879 0.870 0.861 13 0.804 0.788 0.773 0.758 0.743 0.722 0.701 0.681 0.661 0.642 0.650 0.625 0.601 0.577 0.555 0.585 0.527 0.475 0.429 0.388 0.350 0.557 0.497 0.444 0.397 0.356 0.319 0.530 0.469 0.415 0.368 0.326 0.290 0.505 0.442 0.388 0.340 0.299 0.263 0.481 0.417 0.362 0.315 0.275 0.239 12 13 14 14 15 15 Years (n) 1 2 3 1 2. 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 UN 4 0.507 6 7 0.535 482 0.434 0.391 0.352 7 B 9 10 0.480 0.425 0.376 0.333 0.295 0.452 0.404 0.361 0.322 0.456 0.400 0.351 0.308 0.270 8 0.432 0.410 0.390 0.370 0.352 0.335 0.376 0.354 0.333 0.314 0.296 0.279 0.327 0.305 0.285 0.266 0.249 0.233 0.284 0.263 0.243 0.225 0.209 0.194 0.247 0.227 0.208 0.191 0.176 0.162 9 10 11 12 13 11 12 0.317 0.286 0.258 0.232 0.209 0.287 0.257 0.229 0.205 0.183 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065 13 14 14 15 15 Annuity Table Present value of 1 receivable at the end of each year for "w" years at discount rate,r. Discount rate() Years (n) 1% 2% 3% 5% 6% 7% 8% 9% 10% 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 5 4.853 4.713 4.580 4,452 4.329 4212 4.100 3.993 3.890 3.791 1 2 3 4 6 7 6 7 8 9 10 5.795 5.601 5.417 5.242 5.076 6.728 6.472 6.230 6.002 5.786 7.652 7.325 7.020 6.733 6.463 8.566 8.162 7.786 7.435 7.108 9.471 8.983 8.530 8.111 7.722 4.917 5.582 6.210 6.802 7.360 4.767 5.389 5.971 6.515 7.024 4.623 5.206 5.747 6.247 6.710 4.486 4.355 5.033 4.868 5.535 5.335 5.995 5.759 6.418 6.145 8 9 10 11 11 12 10.37 9.787 9.253 11.26 10.58 9.954 12.13 11.35 10.63 13.00 12.11 11.30 13.87 12.85 11.94 13 8.760 8.306 9.385 8.863 9.986 9.394 10.56 9.899 11.12 10.38 7.887 8.384 8.853 9.295 9.712 7.499 7.943 8.358 8.745 9.108 7.139 6.805 6.495 7.536 7.161 6.814 7.904 7.487 7.103 8.244 7.786 7.367 8.559 8.061 7.606 12 13 14 15 15 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% Years (n) 1 2 3 1 2 0.901 0.893 0.885 0.877 0.870 1.713 1.690 1.668 1.647 1.626 2.444 2.402 2.361 2.322 2.283 3.102 3.037 2.974 2.914 2.855 3.696 3.605 3.517 3.433 3.352 0.862 1.605 2.246 2.798 3.274 0.855 1.585 2.210 2.743 3.199 0.847 1.566 2.174 2.690 3.127 0.840 1.547 2.140 2.639 3.058 0.833 1.528 2.106 2.589 2.991 4 5 5 6 7 8 9 10 4.231 4.111 3.998 3.889 3.784 4.712 4.564 4.423 4.288 4.160 5.146 4.968 4.799 4.639 4.487 5.537 5.328 5.132 4.946 4.772 5.889 5.650 5.426 5.216 5.019 3.685 4.039 4.344 4.607 4.833 3.589 3.922 4.207 4.451 4.659 3.498 3.410 3.326 3.812 3.706 3.605 4.078 3.954 3.837 4.303 4.163 4.031 4.494 4.339 4.192 10 11 12 13 14 15 6.207 5.938 5.687 5.453 5.234 6.492 6.194 5.918 5.660 5.421 6.750 6.424 6.122 5.842 5.583 6.982 6.628 6.302 6.002 5.724 7.191 6.811 6.462 6.142 5.847 5.029 5.197 5.342 5.468 5.575 4.836 4.988 5.118 5.229 5.324 4.656 4.793 4.910 5.008 5.092 4.486 4.611 4.715 4.802 4.876 4.327 4.439 4.533 4.611 4.675 11 12 13 14 15 Question [4] Q.4 There are a number of methods to monetise environmental cost and benefits, such as: The effects on production methods Preventative expenditure and replacement cost Human Capital Hedonic Methods Travel Cost Methods Contingent Valuation (a) For each method discuss when they are appropriate and how they are applied: (27 marks) A dyke is proposed to be constructed for river protection of a city against flooding. The higher the dyke, the greater the costs and the lower the risk of flooding. Estimated data are indicated in the following table: Height of dyke (m) 3 Cost of dyke ( millions) 25 Risk of flooding 2 (number of times per year) 4 40 1 5 6 7 65 100 150 0.5 0.1 0.05 (b) The damage by flooding is estimated at 10m each time it occurs. Which design height should be selected if the cost of capital is 10 percent. Assume that the dyke once constructed would be everlasting. (6.33 marks) Total (33.33] marks 5% Present Value Table Present value of 1 in *w* years at discount rate, r. Discount rate (1) Years (n) 1% 2% 4% 6% 8% 9% 10% 1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 4 0.961 0.924 0.888 0.855 0.823 0792 0.763 0.735 0.708 0.683 5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 1 N 3 4 5 6 6 7 8 7 0.942 0.933 0.923 0.914 0.905 0.888 0.871 0.853 0.837 0.820 0.837 0.790 0.746 0.813 0.760 0.711 0.789 0.731 0.677 0.766 0.703 0.645 0.744 0.676 0.614 0.705 0.666 0.630 0.596 0.564 0.665 0.623 0.583 0.547 0.513 0.627 0.582 0.540 0.502 0.467 0.592 0.544 0.500 0.460 0.424 0.558 0.508 0.463 0.422 0.386 8 9 10 10 11 11 12 0.896 0.887 0.879 0.870 0.861 13 0.804 0.788 0.773 0.758 0.743 0.722 0.701 0.681 0.661 0.642 0.650 0.625 0.601 0.577 0.555 0.585 0.527 0.475 0.429 0.388 0.350 0.557 0.497 0.444 0.397 0.356 0.319 0.530 0.469 0.415 0.368 0.326 0.290 0.505 0.442 0.388 0.340 0.299 0.263 0.481 0.417 0.362 0.315 0.275 0.239 12 13 14 14 15 15 Years (n) 1 2 3 1 2. 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 UN 4 0.507 6 7 0.535 482 0.434 0.391 0.352 7 B 9 10 0.480 0.425 0.376 0.333 0.295 0.452 0.404 0.361 0.322 0.456 0.400 0.351 0.308 0.270 8 0.432 0.410 0.390 0.370 0.352 0.335 0.376 0.354 0.333 0.314 0.296 0.279 0.327 0.305 0.285 0.266 0.249 0.233 0.284 0.263 0.243 0.225 0.209 0.194 0.247 0.227 0.208 0.191 0.176 0.162 9 10 11 12 13 11 12 0.317 0.286 0.258 0.232 0.209 0.287 0.257 0.229 0.205 0.183 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065 13 14 14 15 15 Annuity Table Present value of 1 receivable at the end of each year for "w" years at discount rate,r. Discount rate() Years (n) 1% 2% 3% 5% 6% 7% 8% 9% 10% 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 5 4.853 4.713 4.580 4,452 4.329 4212 4.100 3.993 3.890 3.791 1 2 3 4 6 7 6 7 8 9 10 5.795 5.601 5.417 5.242 5.076 6.728 6.472 6.230 6.002 5.786 7.652 7.325 7.020 6.733 6.463 8.566 8.162 7.786 7.435 7.108 9.471 8.983 8.530 8.111 7.722 4.917 5.582 6.210 6.802 7.360 4.767 5.389 5.971 6.515 7.024 4.623 5.206 5.747 6.247 6.710 4.486 4.355 5.033 4.868 5.535 5.335 5.995 5.759 6.418 6.145 8 9 10 11 11 12 10.37 9.787 9.253 11.26 10.58 9.954 12.13 11.35 10.63 13.00 12.11 11.30 13.87 12.85 11.94 13 8.760 8.306 9.385 8.863 9.986 9.394 10.56 9.899 11.12 10.38 7.887 8.384 8.853 9.295 9.712 7.499 7.943 8.358 8.745 9.108 7.139 6.805 6.495 7.536 7.161 6.814 7.904 7.487 7.103 8.244 7.786 7.367 8.559 8.061 7.606 12 13 14 15 15 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% Years (n) 1 2 3 1 2 0.901 0.893 0.885 0.877 0.870 1.713 1.690 1.668 1.647 1.626 2.444 2.402 2.361 2.322 2.283 3.102 3.037 2.974 2.914 2.855 3.696 3.605 3.517 3.433 3.352 0.862 1.605 2.246 2.798 3.274 0.855 1.585 2.210 2.743 3.199 0.847 1.566 2.174 2.690 3.127 0.840 1.547 2.140 2.639 3.058 0.833 1.528 2.106 2.589 2.991 4 5 5 6 7 8 9 10 4.231 4.111 3.998 3.889 3.784 4.712 4.564 4.423 4.288 4.160 5.146 4.968 4.799 4.639 4.487 5.537 5.328 5.132 4.946 4.772 5.889 5.650 5.426 5.216 5.019 3.685 4.039 4.344 4.607 4.833 3.589 3.922 4.207 4.451 4.659 3.498 3.410 3.326 3.812 3.706 3.605 4.078 3.954 3.837 4.303 4.163 4.031 4.494 4.339 4.192 10 11 12 13 14 15 6.207 5.938 5.687 5.453 5.234 6.492 6.194 5.918 5.660 5.421 6.750 6.424 6.122 5.842 5.583 6.982 6.628 6.302 6.002 5.724 7.191 6.811 6.462 6.142 5.847 5.029 5.197 5.342 5.468 5.575 4.836 4.988 5.118 5.229 5.324 4.656 4.793 4.910 5.008 5.092 4.486 4.611 4.715 4.802 4.876 4.327 4.439 4.533 4.611 4.675 11 12 13 14 15