Eco and Environment

| October 16, 2015

This assignment requires you to analyses two alternative solutions to a roads problem. The purpose of this assignment is to get you to demonstrate your understanding of cost-benefit analysis and to demonstrate you can use cost-benefit analysis to model risk and uncertainty.

Your response will be assessed in terms of how well you identify the essential economic issues and how well you employ economic theory to solve them. Limit your response to 3500 words maximum.

 

Please have a good read through the assignment requirements, marking guide, and the support document information “Module 5” is attached.

Assignment 3                                                                      Worth 40%

 

The Freyberg regional roads project

 

Introduction

Road access in and out of New Zealand’s bigger cities, especially Auckland and Wellington, is becoming a major problem. The demand for new roads projects seems to be unlimited, but the supply of funds does not seem able to keep up. This is a good example of the economic problem of scarcity. There are just not sufficient resources to satisfy the demand for them. When this is the case, choices have to be made between alternative uses of those resources. In this assignment, choices have to be made as to the most appropriate use of the funding allocated to roads. Cost-benefit analysis is a technique used to aid the decision-making process.

 

This assignment requires you to analyses two alternative solutions to a roads problem.

 

 

The situation

Freyberg, population 300,000, is a major city where manufacturing is the most important economic activity. Over recent years, however, growth of the manufacturing sector has been hindered by poor road communication to the north. There is only one main transport corridor north of the city. Along the first 60 kilometers of this corridor are four dormitory/satellite towns with a combined population of 100,000.

For the first 20 kilometers, a four-lane motorway leads out of Freyberg along this corridor, but it then turns into a two-lane state highway.

There are major traffic congestion problems along this 40-kilometre stretch of state highway, especially at peak hours.

It is evident that something needs to be done urgently to improve road communication between Freyberg and the region to the north.

The population of Freyberg and the satellite towns is expected to increase over the next 20 years. This will put further pressure on road communications. The regional council has estimated that traffic flows will increase by between 25 per cent and 40 per cent over the next 20 years. The council has further estimated that there is a 60 per cent probability of the traffic flow increasing by 25 per cent and a 40 per cent probability of it increasing 40 per cent.

The problem of road access to and from Freyberg has been the subject of major debate in the region, with local and regional politicians, as well as local pressure groups, lobbying the region’s MPs and the government for budgetary approval for one of the proposals. Two proposals have been put forward. So far, central government has shown little enthusiasm for either of the proposals, and has given priority to funding projects in other parts of the country. The regional council supports the bypass proposal, but the six constituent councils are evenly divided in their support for the two proposals.

 

 

 

The proposals

 

Proposal 1

Upgrade the existing road by extending the four-lane motorway another 40 kilometers.

Upgrading will involve acquisition of land, with some environmental consequences, and resource consents will be required. The upgrade will take 3 years to complete.

 Proposal 2

Construct a bypass road, beginning at the end of the existing motorway and linking up with the state highway at the 60 kilometer point. The bypass will take 5 years to complete.

This road will bypass the four satellite towns but will pass close to an extensive reserve of native forest and will go through a wetlands area. The forest will not be damaged, but access will be improved. The regional council plans to open up the forest for recreational use. Environmental groups are concerned about the potential damage to native flora and fauna. Approximately one quarter of the wetlands will be lost, but the council has promised to develop a management plan that it considers will ensure the long-term survival of this area. The wetlands will also become an educational resource.

Local Maori kiwi has expressed concern about the possible environmental consequences of both of these proposals — in particular, the forests and wetlands developments associated with proposal 2. As tangata whenua, they believe they have a claim to the resources of the forest and the wetlands and insist on full involvement in the decision-making process.

Estimated costs

Proposal 1 — Upgrade existing road Note: All figures given are in $million.

 

Pre-construction costs (resource consents, legal fees, acquisition and so on) $1.5m Costs/benefits Year 1 1-20

                                                                                              Year 1                                           year 2                            year 3

                                                                                                  $m                                               $m                                      $m       

Construction costs                                                           20     15                                           15

                                                                                           Year 4-10                                     Year11-15               Year 16-20

Maintenance costs/year*                                                         2                                            3                                       5

Maintenance costs/year**                                                      3                                            4                                      6

Benefits/year*                                                                            12                                        15                                     18

Benefits/year**                                                                         20                                        23                                     28

* On assumption that traffic flows increase by 25%

** On assumption that traffic flows increase by 40%

Proposal 2 — Construct bypass

Pre-construction costs $3m

Costs/benefits — Year 1-20

   
  Year 1                                      Year 2 Year 3 Year 4 Year 5
  $m                               $m $m $m $m
Construction costs 20                                  25 20 15 15
  Years 6-10 Years 11-15   Years 16-20
Maintenance costs/year* 2 3   4
Maintenance costs/year** 3 4   6
Benefits/year* 20 23   26
Benefits/year** 35 38   42

 

* On assumption that traffic flows increase by 25%

** On assumption that traffic flows increase by 40%

 Note: This second proposal does not take into account the possible costs and benefits associated with access to the native forest or the issues surrounding the wetlands

Forest park and wetlands

The regional council is keen to promote recreational use of the native forest and believes that its management plan for the wetlands will ensure the long-term survival of the birdlife and provide a valuable educational resource.

Once the bypass is open in year 6, the council estimates annual net benefits (benefits minus costs) of $1.5m from the native forest and $0.5m from the wetlands.

Note that these net benefits are in addition to the benefits and costs given for proposal 2 in the table on the previous page.

Required

  1. Using the data supplied, perform a cost-benefit analysis for the two proposals. Use a discount rate of 10 per cent. Either use an Excel spreadsheet and the NPV function, or use present value tables. Which proposal do you recommend?
  2. Introduce risk and uncertainty into your analysis and discuss how they can affect the two proposals.
  3. Discuss issues associated with the valuation of benefits and explain two appropriate methods that could be used to value benefits associated with these proposals.
  4. Discuss the possible influence political factors may have on the two proposals (local, regional and central government conflicts and Maori involvement issues).

Assessment criteria

The purpose of this assignment is to get you to demonstrate your understanding of cost-benefit analysis and to demonstrate you can use cost-benefit analysis to model risk and uncertainty.

The facts for this assignment are hypothetical, but road access to and from a number of New Zealand cities, especially Wellington and Auckland, is indeed a major problem.

 

Your response will be assessed in terms of how well you identify the essential economic issues and how well you employ economic theory to solve them. Limit your response to 3500 words maximum.

 

Assignment 3 marking guide

Marks

  1. Benefit-cost analysis for 2 proposals

Both options calculated                                                                                                          20

Both options analyzed                                                                                                            10

Environmental issues — wetlands, native forest, other                                                           7

  1. Risk and uncertainty

Discounting discussed                                                                                                              5

Calculation with alternative discount rate                                                                                5

Future population growth and traffic flow — probability                                                       8

Other risk issues                                                                                                                       5

  1. Valuation of benefits

Discusses general issues associated with valuing benefits                                                       5

Discusses two methods — for example, contingent valuation                                              10

and travel cost

  1. Political implications

Maori ownership issues discussed                                                                                            5

Other issues — local, regional, central government                                                                 5

  1. Conclusion

Summarized issues                                                                                                                   5

Suggestion made as to preferred option. Suggestion is                                                           5

Compatible with analysis

  1. Report format

Follows report requirements                                                                                                     5

Total: 100

·         Module 5: Assignment 3: The Freyburg regional roads project

  • (Weeks 13-17) In the last module, you will be given an opportunity to perform basic cost-benefit analyses in respect of competing proposals for dealing with traffic congestion to and from the mythical New Zealand city of “Freyberg”. Any similarities with the real cities of Wellington and Auckland are entirely intentional!

Module 5 which mentioned in the above is provided (please see the attached name: Module 5).

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