Peter J Wilcoxen > PAI 723 Economics for Public Decisions

Memo 2

Due Friday 4/21 by 11:59 pm

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.

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.

Submitting:

Please submit the memo on Blackboard before 11:59 pm on the due date. PDF format would be best but other formats are OK if you don't have software that can produce PDF. 

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Peter J Wilcoxen, The Maxwell School, Syracuse University
Revised 04/12/2017