Question

suppose you have to decide whether you will invest in a special liner to reduce the risk of leaking hazardous waste from new landfill you town is installing. the liner will cost $2 million dollars but reduce the risk of leaking from 0.002 to 0.0002. if any leak does occur experts expect to see additional 250 cases of cancer in the town population.

A. What value of an avoided cancer case would justify the liner, assuming risky neutrality

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

Answer A. If the risk is assumed to be neutral the the value of cancer cases that would justify the cost of the liner would be such that it neither is too costly or expensive and nor it’s leads to too much risk from cancer. The percentage should be atleast 1% for the liner to be justified.

Answer B. Qualitatively if we think for the liner to be justified assuming that the people are risk averse then any cost of the liner would be justified as the people do not want even the slighest of the risk. Thus even the .002% risk would justify the cost of the liner.

Answer C. Towns risk aversion should definitely be taken into consideration as it helps in analysing the situation more briefly and with due deligence. It will also help in a better cost benefit analysis of the liner decision and thus we would arrive at a better decision.