A legislative committee is weighing the pros and cons of a clean-air program. If it spends $1 million on the program, the air will be cleaner by 20 percent. If it spends $2 million, the air will be cleaner by 30 percent. If it spends $3 million, the air will be cleaner by 35 percent. After comparing opportunity costs and benefits at the margin, the committee agrees to fund the program with $2 million. Why did it not choose to appropriate $3 million?
Answer
A
At $3 million, the air is not improved as much as the committee would like.
B
At $3 million, the costs are no longer worth the benefits.
C
It was too much to spend without a guarantee.
D
The air is improved by the same amount whether $2 million or $3 million is spent.
Explanation
The increase from $2 million to $3 million improves air quality by only 5 percentage points, compared with the 10-point improvement from $1 million to $2 million. The committee compares the extra benefit of spending another million dollars with its opportunity cost. It chose not to spend $3 million because, at that margin, the additional cost was not worth the smaller additional benefit: choice b, “At $3 million, the costs are no longer worth the benefits.”
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