The state government is considering spending $60 million to protect a local waterway. If they spend this money, experts tell them that the benefits (mostly coming from protecting local fish and wildlife) will be valued at $8 million per year in years 1 through 10.
a. The government budgeting office uses a discount rate of 7% to evaluate whether this is a good use of government funds. Will they suggest that the government should spend the money? Explain why 7% might be a reasonable discount rate for the government to use in this context.
b. The government's environmental protection agency uses a discount rate of 2% to evaluate whether this is a good use of government funds. Will they suggest that the government should spend the money? Explain why 2% might be a reasonable discount rate for the government to use in this context.
c. Now instead, the government is considering spending $60 million on an environmental protection project that will have benefits of $8 million per year 101 years to 110 years in the future. Will the government think it's a good idea to spend the money if it uses a discount rate of 2%? Some would argue that the government should instead use a discount rate of 0% in this case. Explain why and show whether the government should spend the money if it uses a 0% discount rate.