The US EPA administers a program of grants and loans to help state and local governments identify and eliminate brownfield sites. The program's total budget is substantial: about $100 million in a typical fiscal year. An average grant is about $500,000. However, cities are required to contribute some of their own money as well -- typically about 20% of the total budget.
Imagine that the City of Chicago has been awarded a grant and now has total budget of $625,000 for brownfield assessment and cleanup (the $625,000 includes both the federal grant and city's own contribution). You have been hired to help decide how to spend the money. Your predecessor has narrowed a list of potential sites down to three but has left it up to you to decide what actions to take. Below is a short summary of what is currently known about the sites. Where damages are mentioned, the value given is the total cost to the city from having the site in its current condition, including increased crime, reduced property values, lost tax revenue and so on. You may assume that the damages from a brownfield would cease completely if a site is cleaned up or shown to be uncontaminated.
- Cuneo Press. A former printing business. The site is contaminated with radioactive waste of unknown origin and is also polluting an adjoining river. Your predecessor has estimated the site to be causing $50,000 of damages per year in its current state. The degree of contamination is known with certainty. The cost of cleanup is known to be $600,000. If the site were to be cleaned up, it could be done in year 0 and benefits would begin in year 1.
- Roosevelt and California. An abandoned 70 acre site in an area with strong potential for industrial development, including good access to highways and railroads. The current level of contamination is uncertain: there is a 40% chance it is heavily contaminated, a 40% it is lightly contaminated, and a 20% chance it is not contaminated at all. If the site is heavily contaminated, cleaning it up would cost $500,000, which would have to be paid in year 0, and would take 5 years: the first benefits would arrive in year 6. If it is lightly contaminated, cleanup would cost $200,000 in year 0 and benefits would begin in year 1. If it is not contaminated, no cleanup would be necessary and benefits would begin in year 1. The degree of contamination could be determined by a $100,000 test (which would have to be paid for out of your budget). If the site is going to be cleaned up, it must be tested but you may assume that the results are known immediately. In particular, you can assume that the results are available quickly enough that your decision in year 0 about which site(s) to clean up can depend on the results of the test. Estimated damages from the site in its brownfield state: $40,000 per year.
- 76th and Albany. A 62 acre site where extensive illegal dumping took place. Known to be contaminated by lead and other hazardous wastes from abandoned automobiles. The site is currently causing $5,000 of damages per year. However, some of the contaminants have leached into the soil and are gradually seeping toward an important city well. If the site is not cleaned up soon, in 20 years the well will become contaminated and the damages associated with the brownfield will increase by $100,000 a year starting in year 21. Cleaning the site would cost $500,000. If the site were to be cleaned up, it could be done in year 0 and benefits would begin in year 1.
It is up to you to decide what, if anything, should be done about each site. City policy is to use a 5 percent interest rate on all present value calculations and to make decisions by maximizing expected value. You should also assume the city wants to be a responsible steward of the federal contribution by carrying out the analysis as though the entire $625,000 came out of its own budget. Finally, the city is facing a fiscal crisis and the mayor emphasizes that it is not necessary to spend the entire budget if it doesn't make sense to do so. That is, the city does not want to undertake bad projects simply to obtain the matching federal funding: it is OK not to spend the entire $625,000.
Please develop a sound economic plan for using your budget to address some or all of these brownfields and write a short memo explaining the plan.
Allowed Technical Terms:
The following technical terms are allowed in this memo: present value, net present value and expected value. Other technical terms (including "efficiency") should be avoided.
Format:
Please format your memo as professionally as possible. Either single or double spacing is acceptable: single spacing is almost certainly what you'd use in professional circumstances but double spacing is also OK. The maximum length is 2 single-spaced or three double-spaced pages. There's no explicit minimum length but if your memo is less than 1 single-spaced page you're probably being too terse.