1. The damages associated with climate change are uncertain and thus the environmental benefits of a policy are also uncertain. The tables below provide the net benefits of 2 policies (Policy 1 act now paying higher costs now for larger benefits in the future or Policy 2 wait and avoid high costs now but receive lower benefits in the future) given 3 possible outcomes of environmental impacts (low, medium, and high impact) and their associated probabilities. (hint: this problem will be much easier in excel).

Policy 1	1 Year	2 Years	3 Years	4 Years	5 Years
Low (45%)	2	3	4	5	6
Med (50%)	3	5	7	9	12
High (5%)	4	8	16	32	64

Policy 2	1 Year	2 Years	3 Years	4 Years	5 Years
Low (45%)	16	3	3	4	5
Med (50%)	12	4	4	5	6
High (5%)	8	5	6	8	15

1. a) If we cater policy to the medium impact because it is most likely, which policy is preferred using a discount rate of 7%? (hint: find the present value of net benefits for each policy for the medium outcome only as if the medium outcome were the only possible outcome)

2. b) Find and compare the expected present value of net benefits for each policy (using a discount rate of 7%). Which policy is preferred? Discuss how and why your preferred policy changed when you considered all possible outcomes.

3. c) Which policies would pass a benefit cost analysis? Explain why a policy that is not the preferred policy from part b can still pass benefit cost analysis.

4. d) Repeat b) using a discount rate of 2.5% and compare it to your answer for b).

5. e) Discuss how and why your preferred policy changed when the discount rate changed.