Problem
A municipal government is considering 2 policy options to deal with pesticide contamination of its water supply: a new water treatment plant and a ban on pesticide use. The water treatment plant would cost $10 million to develop, design and construct. These costs would be incurred in the initial year (t=0), and the plant would begin operating at the beginning of the next year (t=1). Estimated operating and management costs for the plant are $3.5 million per year, and the plant is expected to be in operation for 10 years. Annual costs of the pesticide ban are estimated at $3 million due to the costs of searching for and substituting non-toxic methods for controlling pests which may be more expensive. Annual estimated benefits are $17 million for the pesticide ban and $26 million for the new water treatment plant option. Conduct a CBA using one of the methods illustrated in the notes. Assume a 5% discount rate to determine which policy option the government should implement - the new treatment plant or the pesticide ban. Would the government's decision be different if it used the benefit-cost ratio?