Problem
Consider a proposed mining project for a wilderness area that is a popular spot for recreation (including backpacking) and biodiversity (it is a unique habitat for endangered wildlife and plants).
Suppose mining is expected to bring profits of $1,000,000 per year for the 10 years of the mining operation. However, mining is expected to reduce backpacking visits from the current level of 10,000 recreation visit days (RVD) per year to 4,000 RVDs per year for the next 10 years. After 10 years, trips would partially rebound to 7,000 RVDs per year for 50 years. If the mine is not opened, recreational use is expected to continue at current levels (10,000 RVD per year) for 50 years. Suppose travel costs studies have determined that an RVD of backpacking in the wilderness is worth $80 per RVD.
I. Set up a benefit cost analysis of the mining project. Note: You will need to calculate the Net Present value for two scenarios: Mining and No mining. In this case, its easiest to just calculate the net benefits in each scenario and not worry about what is a benefit and what is a cost.
i. Do the benefits of mining outweigh the costs at a 6% discount rate?
ii. Do the benefits of mining outweigh the costs at a 3% discount rate?
iii. How would this analysis change if:
a. Mining was delayed 10 years?
b. The benefits of recreation were expected to increase over time, as future demand increases.
c. Non-use value of the wilderness area was incorporated into this analysis.
II. What are some of the concerns about using benefit-cost analysis for environmental policy? Is there any additional information that should ideally be incorporated into this particular analysis?