Question

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Question: MACa = 400 – E, MACb = 300 – E, and MACc = 200 – E. MD = 2E/3, where MAC is Marginal Abatement Co...

MACa = 400 – E, MACb = 300 – E, and MACc = 200 – E. MD = 2E/3, where MAC is Marginal Abatement Cost, MD is marginal damages, and E is emissions.

The regulator is currently using uniform standards to regulate the firms to 270 units of emissions
collectively. (All else equal) What is the Net Social Benefit of switching to individualized
standards?

Answer 1

Cost-benefit analysis is a public sector decision-enabling and planning tool, a measure of
program effectiveness and project efficiency, and a branch of applied welfare economics in
the public finance stream.

The cost-benefit analysis of a project or program uses the net social benefits (NSB)
criterion for evaluation purposes, where NSB equals social benefits (B) less social costs
(C). Efficient social choices involve the selection of those projects for which net social
benefits are highest. The maximisation of net social benefits is the public sector equivalent
to the maximisation of profits in the private sector.

The net social benefits criterion, NSB = B – C, is used for ranking projects or programs
rather than the benefit-cost ratio, B/C, because benefit-cost ratios can be manipulated by redefining
costs as negative benefits, and benefits as negative costs. Just as private firms
maximise profits, and not the profit margin or the rate of profit, in cost-benefit analysis we
again maximise a dollar value rather than a ratio between two different dollar values.

Thus, the net benefit Vs. Cost to environment can be a proper justification in a case to case benefit evaluation and decision making.