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Suppose a proposed public policy could result in three possible outcomes: (i) present value of net benefits of -$4 million, (ii) present value of net
Suppose a proposed public policy could result in three possible outcomes: (i) present value of net benefits of -$4 million, (ii) present value of net benefits of -$1 million, or (iii) present value of net benefits of $10 million. Suppose the society is risk-neutral and the probability of occurrence of each of these three outcomes are, respectively, 0.05, 0.10 and 0.85, should this policy be pursued or be trashed? Why?
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