A new proppant dust control rule for natural gas drillers is expected to cost companies $124...

A new proppant dust control rule for natural gas drillers is expected to cost companies $124 million, and involve $16 million in enforcement costs by the government. If 6,700 cases of moderate lung disease will be prevented at an average cost of $35,000 each as a result of the rule, evaluate the benefit-cost ratio of this policy change.

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Expert Solution

Benefit cost ratio suggests us the overall value of the money spent. If the Benefit cost ratio is greater than 1, this indicates the project's net present value is in profit.

In the above problem, costs involved = costs to companies + enforcement costs = $124,000,000 + $16,000,000 = $140,000,000

Benefits are indirectly the money saved when the lung diseases are avoided, hence in this case, the total money saved = number of cases * average cost of each case = 6700 * 35,000 = $234,500,000

Hence the required benefit cost ratio is as follow:

Since the ratio is grater than 1 the policy change will have net benefits if implemented.

orchestra answered 1 year ago

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