Suppose a proposed public policy could result in three possible outcomes: (1) present value of net benefits of $4million, (2) present value of net benefits of $1million (3) present value of net benefits of -$10,000,000 (a loss). Suppose the society is risk-neutral and the probability of each of these outcomes occurring is, 0.85, 0.10 and 0.05 respectively, should this policy be pursued or cancelled? Explain why or why not? If society is more risk averse, how would the probabilities of the outcomes occurring be affected? What is the impact on public policy decisions?
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