Question

You are designing a new hazardous waste landfill. You must decide whether it is worth spending $1,000,000 to install a special liner that reduces the probability of a leak from 0.001 to 0.0001. If a leak happens the expected number of fatal cancers can be expected to rise a total of 100.

A. What value of a fatal cancer (in $) is necessary to justify the installation of the special liner.

B. You know that people in town are risk-averse. Qualitatively, how would you answer differ if you took this into consideration

C. Should you take the town population's risk aversion into consideration?

Answer 1

ans.Given that the cost of a special liner that reduces the probability of a leak from 0.001 to 0.0001 is $1,000,000. If a leak happens, then the expected number of fatal cancers can be expected to increase by a total of 100 without the installation and so the special liner prevents 100 fatal cancer cases. The probability of leakage will become 0.0001 and the value of a fatal cancer necessary to justify the installation of the special liner is

value = 0.0001*1000000/100 = $1 per fatal cancer case