Question

You are asked to conduct a short-term analysis of the net benefits of a new proposed set of regulations designed to improve air quality. Short term means over its first five years. You have three sets of information:

i) Firms affected by the regulation have reported that their costs will increase by 150 million dollars each year to meet the new regulatory requirements that are technology based standards (and you can believe them).

ii The second set of information is the health effect of the policy. It is estimated that with current air quality conditions 100 asthmatic teenagers die pre-maturely each year due to the air pollutants. If the policy was adopted we could reduce that number to 75 premature deaths due to pollution.

iii) From a study of the middle aged men and women’s decisions about where they work and what pay they accept, you know that they receive $5,000 more annually in increased wages for each 1/1000 increase in the risk of serious accidents that cause death. You can assume that all benefits and costs accrue at the end of each year.

a) Based on the information provided, do you recommend the government proceed with the new regulation? Provide supporting evidence and explanation to support your case, and state any assumptions and limitations of your analysis.

b) Would your recommendation change if instead the government used a permit trading program with costs of only 100 million annually, to achieve the same outcome?

Answer 1