Introduction To Environmental Economics

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 ECP 3302: Introduction To Environmental Economics

Term Paper: Cost-Benefit Analysis of the Metro-Dade Mass Transit

 

Before you start working on this problem you need to develop some parameters (numbers). You may use your own Social Security Number (SSN). This 9 digit number has to be unique (different for everyone). If you are not comfortable using your actual SSN, you can rearrange the digits back and forth to make it up. You will need to email me your 9 digit number (email through blackboard; subject line: 9 Digit No for the Term Paper Project) and get it approved.

 

Please write down your 9 single digit number            ___ ___ ___ ___ ___ ___ ___ ___ ___

 

Denote each digit as:                                                   X1  X2  X3  X4  X5  X6   X7  X8   X9

 

Further, define X10 as: X10 = sum of all nine digits (X1 to X9)

 

For example,

 

If your initial 9 digit number: 7 4 1 6 5 10 8 3 5. The values of X1 to X10 are: X1=7 X2=4 X3=1 X4=6 X5=5 X6=10 X7=8 X8=3 X9=5 and X10 = 49

 

In this assignment, you are asked to use the above parameters (X1, X2, …, X10) in certain cases.

 

Background

The Metro Dade Transit Authority (MDTA) is considering a proposal to extend its metro rail service to Southwest Dade including Homestead, a fast growing residential area. You have been consulted by the Authority to conduct a project feasibility analysis. The project entails large startup costs that have to be financed through selling new bonds. The servicing of debt on these bonds is very expensive. If the project does not go well, the ultimate burden of the project would fall on city tax payers. Tax payers are not as much excited about the project. However, daily city commuters coalition and local environmentalists are in favor of the project as the new public transit system would reduce time wasted in the congested automobile traffic, reduce air and noise pollution, and reduce energy consumption. You’re provided with the following technical and economic data:

 

  • The population in year 2003 in the affected area of the city is 200,000. The population is expected to grow at an annual rate of 1.25 percent. People travel only on weekdays (i.e., 5 days). On an average, people get 10 days of vacation and 10 holidays every year during which they do not commute to work.

 

During every weekday, each citizen undertakes X6 number of trips through one of the transportation mode mentioned below. Each trip is called a passenger trip (PT). Currently, 80 percent of the total PTs by all citizens are made in private cars and the rest in minibuses. Each PT consists of X2+X4+X6 number of miles. The average fuel efficiency (for both buses and cars) in the city is estimated to be 18 miles/gallon. The current gasoline price is $1.60 per gallon. This price will increase at a rate of 3 percent every year.

 

  • The new metro rail will not affect the number of PTs or their origin and destination. About 90 percent of the private car PT and all of the minibus PTs will switch to new metro. If the construction starts in 2010, it will take 4 years to complete the project. The total initial construction costs of the project are $280 million, which will be distributed over four year period (i.e., 2010, 2011, 2012 and 2013) equally. The annual operating costs include two components: fixed annual operating costs of X10 million dollars, and variable operating costs of $(X8 ÷ 100) per passenger mile.

 

  • During the construction period, several city roads must be closed causing a traffic delay of X2+X8 minutes per PT. The estimated average value of travel time is $X7 per hour.

 

  • Because of the construction of new railway, 10 commercial buildings (with an average market value of X5 million dollar), 500 residential buildings (with an average market value of 3000 times X10) will have to be relocated. The MDTA is required to pay the compensation to property owners at the rate of 150 percent of the market value in the beginning of the project.

 

  • The rail travel is going to save an average of X2+X8 minutes per PT.

 

  • The fuel efficiency of cars is expected to increase to 25 miles/gallon after the commissioning of metro rail due to reduced traffic congestion.

 

  • The following information is available on traffic accidents.

 

Type of Accidents

Number of Accidents Per Million of car & bus PT

Costs of Accident ($/accident)

Fatal

0.01

$900,000

Serious

0.50

$100,000

Minor

2.00

$10000

 

  • The new metro is going to improve the city air quality by way of reducing the suspended particulate matter (SPM) by 75 percent. A recent survey of households indicated that each household would be willing to pay five times $X2 for every percent of SPM reduced annually. There are 20,000 households in this part of the city.

 

  • The rail fare for the first 7 years will be $1.20 per PT, for the next 10 years $1.40 per PT, and for rest of the project period $1.60 per PT.

 

An Excel worksheet containing the benefit-cost analyses of the above project can be found on line. Please do the following using that worksheet:  

 

Download the Excel worksheet and plug in your 9 digit number under the column “Your 9 Digit No” which will automatically compute all the benefit-cost analysis numbers for the project.

Study the entire worksheet, paying particular attention to differences in the two benefit-cost analyses: financial benefit cost (b-c) analysis, and community’s socio-economic benefit cost (b-c) analysis. Note that each analysis is conducted using a discount rate of X9 percent.

 

Answer the following questions:

  1. List various costs and benefit items under each of the two B-C analyses. Explain why there are such differences between the two analyses. Please make sure to study the spreadsheet in detail before you answer this question.

 

  1. Explain how the following concepts or principles have been applied to the B-C analysis conducted in the worksheet (you need to explain the following concepts in terms of actual numbers that you get from your worksheet. Hint: reading chapter 8, 9 & 10 might help in answering this question).

 

  1. Opportunity cost principle
  2. Non-market benefits
  3. With and without principle
  4. Operation and maintenance costs
  5. Public goods
  6. Damage compensation

 

  1. Compute Internal Rate of Returns for the project (financial and socio-economic), using the worksheet.

 

  1. Present (using appropriate tables) the main results of your analysis: total (30 years) discounted and undiscounted benefits and costs, net present values, B-C ratios and IRRs for both analyses. Based on these results, make recommendations to the MDTA Director as to whether the project is financially and economically viable or not, with justification. Your justification should point to some of the economic principles that we discussed in this course. Also, the recommendation must indicate important project indicators such as benefit-cost ratio, net present values, and internal rate of return. Make sure to explain why you conducted the three types of analyses, what the differences are, etc.

 

  1. Discuss any two funding mechanisms for raising money for this project.

 

Your report must be neatly typed in single space. Make sure to indicate your 9 Digit Number in the front. Present all the main numbers (Benefit Cost Ratio, NPV, etc.) in a table. I expect this report to take at least 4 pages. Evaluation: I will be looking for 2 important aspects: a) how well you intertwine economic concepts you learn (or not learn) in this class with your responses; b) how well you answer the above questions using the actual numbers from your spreadsheet, which should be based on your 9 digit number. The overall neatness, writing style, and critical analysis will receive consideration.

Solution.


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