D2.Eco.7.9-12: Using Benefits and Costs to Evaluate Government Policies
In plain English: D2.Eco.7.9-12 is the C3 Framework economics indicator for grades 9-12 that asks students to use benefits and costs to evaluate how effective government policies are at improving market outcomes. Students compare policy options by net benefit, separate real costs from transfers, ask who pays, and check estimates against results.
Use benefits and costs to evaluate the effectiveness of government policies to improve market outcomes.
C3 Framework for Social Studies (NCSS) · Dimension 2: Applying Disciplinary Concepts and Tools · Discipline: Economics · Exchange and Markets · Official standard
D2.Eco.7.9-12 asks students to use benefits and costs to evaluate the effectiveness of government policies meant to improve market outcomes. Markets can fall short when some benefits or costs fall on people outside a sale, as with flood protection that shields a whole neighborhood or trucks that wear out public roads. Governments respond with projects, rules, taxes and subsidies. Evaluating such a policy means asking whether its benefits to society are greater than its costs, whether another option would do better, which effects are real gains or losses and which are only money moving from one group to another (transfers), who pays, and whether the results matched the estimates.
Students read the benefit-cost test that Congress wrote into the Flood Control Act of 1936 (Source 1) and A. C. Pigou's 1920 case for taxes and subsidies, together with his warning that real governments fall short of ideal ones (Source 2). They then evaluate four invented flood options for a fictional city (Source 3), using net benefits, marginal comparisons, cost shares and the views of the groups affected.
Learning Objectives
By the end of this lesson, students will be able to:
Apply a benefit-cost test to a government policy and compare alternatives by net benefit and by the added benefit and cost of each step
Distinguish real benefits and costs to society from transfers, sunk costs and effects that do not count
Evaluate a tax or subsidy meant to make buyers and sellers face the full costs or benefits of their choices
Explain how cost sharing, interest groups and estimation errors affect how well a policy works
Judge a policy's effectiveness by comparing estimated with actual benefits and costs
Prior Knowledge Required
Students should already be comfortable with:
Using marginal benefits and marginal costs to argue for or against a solution D2.Eco.2.9-12
Explaining possible reasons for a government role in markets when markets are inefficient D2.Eco.6.9-12
"A city could spend $5 million on a project that would save homeowners $8 million in flood damage. Is that enough information to say the city should do it? What else would you want to know?"
Collect answers. Students usually ask who pays, whether there is a cheaper way, how sure the estimates are, and whether anyone is harmed. Tell them that each of those questions is part of evaluating a government policy with benefits and costs, which is what D2.Eco.7.9-12 asks them to do. Today they will use the questions on real historical sources and an invented city.
Direct Instruction20 minutes
Key terms for D2.Eco.7.9-12 (working definitions)
Term
Meaning
Why it matters for evaluation
Market outcome
What buyers and sellers produce and trade, and at what prices, without a new policy
The baseline a policy is measured against
External cost or benefit
A cost or benefit that falls on people outside a sale
The usual reason a market produces too much or too little
Net benefit
Total benefits to society minus total costs to society
A policy improves the outcome only if this is positive
Incremental (marginal) comparison
The added benefit and added cost of moving from one option to a bigger one
Shows whether each extra step is worth it
Transfer
Money that moves from one group to another, such as a fee paid to the government
Not a cost or benefit to society as a whole
Cost-effectiveness
The cost of reaching one unit of a goal, such as one home protected
Useful when benefits are hard to put in dollars
Present value
Future benefits and costs converted into today's dollars
Lets projects with different timing be compared
Ex-post evaluation
Checking a policy's benefits and costs after it has run
Tests whether the estimates were right
Part 1: The test. A policy improves a market outcome only if its benefits to society, to whoever they go, are greater than its costs. But passing the test is not enough. Compare every reasonable alternative, including doing nothing, and choose the one with the greatest net benefit. When options can be scaled up, check each step: the added benefit should be at least the added cost.
Part 2: What counts. Count real resources gained or used up: damage avoided, time saved, materials, labor, the value people lose when they give something up. Do not count transfers as benefits or costs, and leave out sunk costs (money already spent that no choice can recover). Then ask who gains and who pays, because a policy with positive net benefits can still place heavy costs on one group.
Part 3: Did it work? Estimates made before a policy are often too hopeful. An effective policy is one whose actual benefits turn out larger than its actual costs, so good evaluation also looks back.
Applying a benefit-cost test (invented)
A federal agency reviews two flood projects. Project 1 has estimated benefits of $14 million and costs of $11 million (present values). Project 2 has benefits of $9 million and costs of $10 million. Which passes a test that requires benefits to exceed costs?
Result: Project 1: $14M - $11M = $3M net benefit; benefits are about 1.27 times costs, so it passes. Project 2: $9M - $10M = -$1M, so it fails. A failing project can still be built, but the test says it would use up more value than it creates.
A fee that makes users pay for damage (invented; Diagram 1)
Heavy trucks in a state drive 200 million miles a year. Each mile costs shippers $0.90 and does $0.15 of road damage that taxpayers repair. A $0.15-a-mile fee cuts driving to 180 million miles. Running the fee costs $1.2 million a year. Evaluate the fee.
Result: Damage avoided on the 20 million miles not driven: 20M x $0.15 = $3.0M. Value shippers give up on those miles (the triangle under demand and above $0.90): 1/2 x 20M x $0.15 = $1.5M. Net benefit: $3.0M - $1.5M - $1.2M = $0.3M a year. The fee collects 180M x $0.15 = $27M, but that is a transfer from shippers to the state, not a cost or benefit to society as a whole.
Cost-effectiveness when benefits are hard to price (invented)
Two programs aim to protect homes from floods. Program X costs $7.2 million and protects 480 homes. Program Y costs $10 million and protects 800 homes. Which is more cost-effective?
Result: X: $7,200,000 / 480 = $15,000 a home. Y: $10,000,000 / 800 = $12,500 a home. Y is more cost-effective, even though it costs more in total. Cost-effectiveness ranks ways to reach a goal; it does not show whether the goal itself is worth its cost.
Looking back: an ex-post evaluation (invented; Diagram 2)
A dam was approved with estimated benefits of $80 million and costs of $60 million. Twenty years later, analysts found that it had cost $95 million and produced $70 million in benefits. Was it an effective policy?
Result: Estimated net benefit: $80M - $60M = $20M. Actual net benefit: $70M - $95M = -$25M. In hindsight it failed the test by $25 million. Possible reasons: cost overruns, benefits that were overestimated, or pressure from groups that wanted the project. An evaluation should ask which, so the next estimate is better.
Teacher tip. Students often treat fee revenue as a benefit or count every dollar spent as a cost to society. Ask, "Did any real resource get used up or saved, or did money only change hands?" Also watch for students who pick the option with the highest ratio of benefits to costs; a small, cheap option can have a high ratio and still add less net benefit than a larger one.
Guided Practice15-20 minutes
Congress writes a benefit-cost test into law. Context note: Congress passed the Flood Control Act in June 1936, months after severe floods in March 1936 struck Pittsburgh and other cities in the Northeast. The Act is often described as one of the first federal laws to write a benefit-cost test into U.S. policy. In 1936 the Army Corps of Engineers was part of the War Department. Read Source 1 aloud. Glossary: "menace" (threat), "navigable waters" (rivers that boats can use), "tributaries" (streams that flow into a larger river), "watersheds" (all the land that drains into a river), "political subdivisions" (counties, cities and other local governments), "easements" and "rights-of-way" (rights to use land owned by others), "hold and save ... free from damages" (take responsibility for any damage claims).
1SECTION 1. It is hereby recognized that destructive floods upon the rivers of the United States, upsetting orderly processes and causing loss of life and property, including the erosion of lands, and impairing and obstructing navigation, highways, railroads, and other channels of commerce between the States, constitute a menace to national welfare; that it is the sense of Congress that flood control on navigable waters or their tributaries is a proper activity of the Federal Government in cooperation with States, their political subdivisions, and localities thereof; that investigations and improvements of rivers and other waterways, including watersheds thereof, for flood-control purposes are in the interest of the general welfare; that the Federal Government should improve or participate in the improvement of navigable waters or their tributaries, including watersheds thereof, for flood-control purposes if the benefits to whomsoever they may accrue are in excess of the estimated costs, and if the lives and social security of people are otherwise adversely affected.
[...]
2SEC. 3. That hereafter no money appropriated under authority of this Act shall be expended on the construction of any project until States, political subdivisions thereof, or other responsible local agencies have given assurances satisfactory to the Secretary of War that they will (a) provide without cost to the United States all lands, easements, and rights-of-way necessary for the construction of the project, except as otherwise provided herein; (b) hold and save the United States free from damages due to the construction works; (c) maintain and operate all the works after completion in accordance with regulations prescribed by the Secretary of War [...]
Seventy-fourth Congress of the United States, Flood Control Act of 1936, sections 1 and 3 (Source 1: the federal benefit-cost test) (1936). US government work (17 U.S.C. 105). Source text.
Market failure in the text. Prompt: which words in paragraph 1 show why private markets alone might not provide flood control? Teacher note: floods harm "life and property" and "channels of commerce between the States"; protection from a river cannot be sold only to the people who pay for it, so private buyers would provide too little.
Two conditions. Prompt: paragraph 1 ends with a condition beginning with "if." Rewrite it in your own words, and say whether it is one condition or two. Discuss the answers as a class, but do not settle them yet; students return to this condition in the quiz.
Federal and local roles. Prompt: paragraph 2 lists three things local governments must promise before federal money is spent. Teacher note: have pairs list them in their own words, then ask: how does paying part of the cost change what a local government will ask for?
An economist on taxes, subsidies and real governments. Context note: A. C. Pigou (1877-1959) taught economics at Cambridge in England. In 1920 he argued that when a business's "trade net product" (what it earns for its owners) differs from its "social net product" (what it adds to or takes from society as a whole), the government can close the gap. In the third paragraph he is discussing monopolies, but his warning applies to any intervention. Glossary: "divergence" (gap), "bounties" (payments from the government, today usually called subsidies), "petrol" (gasoline), "licence" (British spelling of license), "unfettered" (free of rules), "sectional pressure" (pressure from one group or region), "constituents" (the people officials represent).
1[...] It is, however, possible for the State, if it so chooses, to remove the divergence in any field by "extraordinary encouragements" or "extraordinary restraints" upon investments in that field. The most obvious forms, which these encouragements and restraints may assume, are, of course, those of bounties and taxes. Broad illustrations of the policy of intervention in both its negative and positive aspects are easily provided.
2The trade net product of any unit of investment is unduly large relatively to the social net product in the businesses of producing and distributing alcoholic drinks. Consequently, in nearly all countries, special taxes are placed upon these businesses. [...] The principle is susceptible of general application. It was employed, though in a very incomplete and partial manner, in the British enactment of a special petrol tax and motor car licence upon the users of motor cars, the proceeds of which were to be devoted to the service of the roads. [...]
[...]
3[...] The case, however, cannot become more than a prima facie one, until we have considered the qualifications, which governmental agencies may be expected to possess for intervening advantageously in this class of matter. It is not sufficient to contrast the imperfect adjustments of unfettered private enterprise with the best adjustment that economists in their studies can imagine. For we cannot expect that any State authority will attain, or will even whole-heartedly seek, that ideal. Such authorities are liable alike to ignorance, to sectional pressure and to personal corruption by private interest. A loud-voiced part of their constituents, if organised for votes, may easily outweigh the whole. [...]
A. C. Pigou, The Economics of Welfare, Part II, chapters VI and XVII (Source 2: taxes, bounties and the limits of government) (1920). Public domain (published 1920). Source text.
Pigou's tools. Prompt: connect paragraph 1 to Diagram 1. Which kind of tool is the road-wear fee, an encouragement or a restraint? Teacher note: a restraint, because it raises the cost of an activity whose cost to society is greater than its cost to the user.
A fair comparison. Pairs discuss: before you read paragraph 3, would you compare a real market with a perfect government or a real government? Collect two or three answers; the quiz asks what Pigou concluded.
Independent Practice15-20 minutes
Choosing a flood policy. Source 3 is an invented scenario with invented estimates. Students read it and study the table.
1Invented scenario, written for this page. Millbrook is a fictional river city of about 85,000 people. The Ash River has flooded the low-lying east side four times in the past 30 years, damaging homes, small businesses, two schools and the main road to the hospital. Private insurance covers only part of these losses, and many households have none.
2The city asked engineers and economists to compare four ways to reduce flood losses. For each one they estimated the benefits and the costs over the next 50 years, all converted to today's dollars (economists call this present value). Benefits are mainly flood damage avoided; for Option B they also include the value of a new riverside park. Costs include construction, buying land and upkeep. Under the cost-sharing rules in this scenario, the federal government pays 65% of the cost of whichever option is chosen and the city pays 35%.
3Option A: raise and extend the levee (an earth wall along the river) so that it protects both the east side and downtown.
4Option B: buy 120 of the homes that flood most often, at fair market prices, help the families move, and turn the land into a park that can safely flood.
5Option C: build a flood-warning system and give grants to 900 homeowners to raise furnaces and seal basements.
6Options B and C can also be combined. Because both protect some of the same homes, the benefits of the combination are less than the two benefits added together.
7Some east-side families who have lived there for generations oppose the buyouts. The downtown business association supports the levee.
SVHS (invented scenario written for this page), Four Flood Options in Millbrook (Source 3: invented scenario). Original passage written for this page.
Millbrook flood options: estimated benefits and costs over 50 years, present value in millions of dollars (invented data)
Option
Benefits
Costs
A: raise and extend the levee
$66
$48
B: buyouts and riverside park
$45
$30
C: warning system and home grants
$21
$9
B and C combined
$60
$39
Invented data for Source 3. Students work on their own: (1) add a column for net benefit and a column for the city's 35% share of each cost; (2) list each group affected by each option and whether it gains or pays; (3) name one benefit or cost that the table probably leaves out. Quiz questions 9-14, 16 and 17 use Source 3.
Closure15-20 minutes
Exit ticket: In three sentences, explain why "the benefits are bigger than the costs" is a necessary but not a sufficient reason to choose a policy.
Teacher note on the sources: Source 1 is transcribed exactly from the Statutes at Large page images, with the omitted section and provisos marked. Source 2 is quoted exactly from Pigou's 1920 first edition and checked against the page images; Pigou revised the book in later editions. Source 3, the trucks, the dam and every number in the worked examples and activities are invented. The lesson does not take a position on any current flood program, fee or tax. Rubrics score the use of benefits, costs and evidence, so students who recommend different Millbrook options can all earn full credit.
Differentiation Strategies
For Struggling Students
Give a three-column organizer for each policy: real benefits, real costs, transfers and other items that do not count
Provide the Source 3 table with the net-benefit column started for the first row
Pair Source 1 with a plain-language version of its final condition written by the teacher
For Advanced Students
Explain why benefit-cost analysts convert future values to present value, and what a higher discount rate would do to a project whose costs come early and benefits come late
Write a short memo on how Section 3's local-cost rule might change which projects local governments ask for, using Pigou's warning about "sectional pressure"
Find a published federal benefit-cost or program evaluation and report what it compared and what it could not measure in dollars
Assessment Guidance
What to Look For
Strong answers compute net benefits correctly, compare alternatives and the added benefit and cost of a bigger option, leave transfers and sunk costs out, name who pays and who gains, and treat estimates as uncertain, ideally checking them against results. Watch for students who stop at "benefits exceed costs," who rank options by the ratio of benefits to costs, who count fee revenue as a gain to society, or who ignore groups that bear concentrated costs.
02
Classroom Activities
3 Activities
1
Benefit-Cost Review Board
20 minGroups of 3-4
Each group is a review board in the style of the 1936 Act. It receives 4 invented project cards, applies the benefit-cost test, ranks the projects that pass by net benefit, and then chooses which to fund with a budget of $9 million. Each group also flags one concern about who gains or pays.
The 4 Project Cards (invented, present values)
Elk Creek levee: benefits $8.4 million, costs $6.0 million; protects a town of 3,000.
Pine Fork reservoir: benefits $22 million, costs $25 million; also supplies water to a new golf resort.
Fox Bend channel dredging: benefits $5.5 million, costs $2.5 million; most of the benefits go to one barge company.
Upstream tree planting and small check dams: benefits $3.6 million, costs $3.0 million; the benefit estimate is very uncertain.
Answer Key for the Teacher
Pass the test: cards 1, 3 and 4. Card 2 fails (net benefit -$3 million).
With $9 million: cards 1 and 3 together cost $8.5 million and add $5.4 million of net benefit, the most any affordable set can add. Cards 3 and 4 cost $5.5 million and add $3.6 million; all three cost $11.5 million, over budget.
Concerns to accept: card 3's benefits go mainly to one company, which could be asked to share the cost; card 4's estimate is uncertain; card 2's water for a resort may be a benefit to a narrow group.
Discussion Questions
Card 3 has the highest net benefit. Should the barge company pay part of its cost? How would that change the evaluation for society as a whole?
How would you check, ten years later, whether card 1 had worked?
2
Count It or Not?
15 minPairs
Pairs sort 8 cards about the invented road-wear fee from Direct Instruction into four piles: real benefit to society, real cost to society, transfer, or does not belong in the evaluation. Pairs must write one reason on each card, then compare with another pair.
The 8 Cards (invented)
$3.0 million a year of road damage avoided.
$27 million a year of fee revenue paid by shippers to the state.
$1.2 million a year to run the fee system.
The value shippers give up on trips they no longer make.
$40 million the state spent building truck weigh stations in 2010.
Fewer crashes, because trucks drive fewer miles.
The fee money the state now spends on road repair instead of using other taxes.
The governor's popularity among trucking companies.
Answer Key for the Teacher
Real benefit: cards 1 and 6 (card 6 is real but was left out of the worked example, so the worked example's net benefit is probably too low).
Real cost: cards 3 and 4.
Transfer: cards 2 and 7 (money moves among shippers, the state and other taxpayers; the repairs themselves are counted through card 1).
Does not belong: card 5 (a sunk cost) and card 8 (not a benefit or cost to society from the policy).
Modification for English Learners
Give each pile an icon and a sentence frame: "This is a ___ because ___ is used up / saved / only moved."
3
Millbrook Council Hearing
20-25 minGroups of 5
Each group holds a mock city council hearing on Source 3. Four students take the role cards and speak for two minutes each; the fifth chairs the hearing and writes the decision. Every speaker must use at least one number from the Source 3 table and say who gains and who pays. The group then votes and the chair writes a one-paragraph decision that answers the strongest opposing argument.
The 5 Role Cards (invented)
Downtown business owner: wants the levee because it is the only option that protects downtown.
East-side homeowner in the buyout zone: has lived there for 40 years and does not want to move, even at a fair price.
Taxpayers' association member: focuses on the city's 35% share and on the risk of cost overruns.
City economist: presents net benefits and the added benefit and cost of each larger option.
Chair: keeps time, asks each speaker one question and writes the decision.
Scoring Note
Score the reasoning, not the option chosen. A strong decision compares net benefits, explains how the vote treated the groups that bear concentrated costs, and says how the city would check later whether the policy worked. Any option can earn full credit if the reasons are sound.
Discussion Questions
Which speaker in your group was the "loud-voiced part" Pigou warns about, if any? Was that speaker wrong?
Did the group's vote match the option with the greatest net benefit? If not, what reason outweighed the numbers?
03
Diagrams & Visual Aids
2 diagrams
Diagram 1: A Fee That Makes Users Pay for Road Damage (Invented Example)
Drawn to scale for the invented road-wear fee in Direct Instruction. Without a fee, shippers drive 200 million truck-miles a year, stopping where the value of a mile equals their own cost of $0.90. Each mile also does $0.15 of road damage that they do not pay for. A $0.15 fee cuts driving to 180 million miles. The shaded triangle is the net gain to society from the miles no longer driven, before the cost of running the fee. The price axis starts at $0.60.
Diagram 2: Checking a Policy's Estimates Against Its Results (Invented Example)
Bars drawn to scale, in millions of dollars of present value, for the invented dam in Direct Instruction. Before approval the dam passed a benefit-cost test; measured afterward, its costs were higher and its benefits lower than estimated.
04
Homework Assignment
~30 min
D2.Eco.7.9-12 Homework: Evaluating Policies with Benefits and Costs
Directions: Part 1 uses new invented cases. Part 2 uses Sources 1-3 in the lesson plan. Show every calculation, and say which items you left out of an evaluation and why.
Part 1: New Cases (Problems 1-3)
Invented example: a county can make a dangerous rural crossing safer in one of three ways. A traffic signal costs $2.0 million and avoids $5.0 million of crash losses; a roundabout costs $3.5 million and avoids $7.5 million; an overpass costs $12 million and avoids $13 million (all present values). Find each option's net benefit, the added benefit and added cost of moving from the signal to the roundabout, and the option you would recommend.
Invented example: night flights at a city airport cause noise damage to nearby residents of about $300 a flight. The city charges airlines a $300 fee for each night flight, and night flights fall from 1,000 to 850 a year. Airlines give up $18,000 of value on the canceled flights, and running the fee costs the city $10,000 a year. Find the fee revenue, the damage avoided and the net benefit to society, and explain why the revenue is not part of the net benefit.
Invented example: a job-training program was approved with estimated benefits of $50 million and costs of $35 million. An evaluation five years later found actual benefits of $44 million and actual costs of $47 million. Compute the estimated and the actual net benefits, decide whether the program was effective, and suggest two questions evaluators should ask about why the estimates were wrong.
Part 2: Using the Sources (Problems 4-6)
Source 1 counts benefits "to whomsoever they may accrue." Explain what this phrase means for a project in one state whose benefits go mostly to farms in a neighboring state. Then explain how Section 3's requirements for local governments might affect which projects get proposed.
Source 3: suppose new federal rules lower the federal share to 50%, so Millbrook must pay half of the cost of any option, and the city can afford to pay no more than $16 million. Which options can it afford, and which affordable option has the greatest net benefit? Explain how a budget limit changes the evaluation.
Write a one-page evaluation memo recommending one Millbrook option. Use net benefits and at least one incremental comparison from Source 3, one idea from Source 1, Pigou's warning in Source 2, a discussion of who gains and who pays, and a plan for checking the policy's results after ten years.
Rubric
Criterion
Full Credit (2 pts)
Partial Credit (1 pt)
No Credit (0 pts)
Calculations
Net benefits, incremental values, shares and fee amounts correct in Problems 1, 2, 3 and 5
One or two errors
Transfers or sunk costs counted, or totals used incorrectly
Evaluation
Compares alternatives, separates real effects from transfers, and judges effectiveness against results
Applies the test to one option only
No evaluation
Distribution
Names who gains and who pays, and weighs concentrated costs
Names groups without weighing them
Not discussed
Use of Sources
Accurate use of Sources 1-3 in Problems 4-6
Sources used loosely
Sources not used
05
Quiz: 20 Questions
Interactive, with answers
Instructions
Questions 1-4 use Source 1 and questions 5-7 and 19 use Source 2, both in Guided Practice. Question 8 uses Sources 2 and 3. Questions 9-14, 16, 17 and 20 use Source 3 and its table in Independent Practice. Questions 15 and 18 use new invented examples. Your score updates as you answer, and Reset quiz clears everything.
Multiple choice: pick an option to check it. Short answer: write your answer, then reveal the model answer.
0 of 20 answered · 0 correct
Question 1 of 20 · Multiple Choice
According to Source 1, paragraph 1, when should the Federal Government take part in flood-control improvements?
Answer: D
The paragraph ends: the Federal Government should act "if the benefits to whomsoever they may accrue are in excess of the estimated costs, and if the lives and social security of people are otherwise adversely affected." Both conditions apply. Choice A adds a condition the text does not contain. Choice B confuses one harm the text lists with the test. Choice C adds a payment condition that the paragraph does not contain.
Question 2 of 20 · Multiple Choice
Source 1, paragraph 1, says floods obstruct "navigation, highways, railroads, and other channels of commerce between the States." Why does this support a federal role, not only a local one?
Answer: A
When a flood cuts a railroad or a river route, shippers and travelers far away lose too, so many of the benefits of flood control fall outside the town or state that would build it. A local government counting only its own residents' benefits would build too little. Choice B is false: states and private companies owned many roads and railroads. Choices C and D are not in the source.
Question 3 of 20 · Multiple Choice
According to Source 1, paragraph 2, what must local governments promise before federal money is spent on a project?
Answer: B
Section 3 requires assurances that local agencies will "(a) provide without cost to the United States all lands, easements, and rights-of-way," "(b) hold and save the United States free from damages," and "(c) maintain and operate all the works after completion." Choices A, C and D are not in the section; the federal government pays for construction itself.
Question 4 of 20 · Multiple Choice
How could Section 3's local requirements in Source 1 make federal flood policy more effective?
Answer: D
When local governments must bear part of a project's cost, they have a reason to ask only for projects worth their share of the cost, which checks the pull toward projects that are free locally but costly to the nation. Choice A is false. Choice B is false: section 3 adds conditions, it does not remove the test. Choice C overstates: cost sharing improves incentives but guarantees nothing.
Question 5 of 20 · Multiple Choice
According to Source 2, paragraph 1, what are the most obvious tools the State can use to remove a divergence between trade and social net product?
Answer: A
Pigou writes that "the most obvious forms" of "extraordinary encouragements" and "extraordinary restraints" are "those of bounties and taxes": subsidies for activities that do too little good for society and taxes on those that do harm. Taxes of this kind are still called Pigouvian taxes. Choices B, C and D are other policy tools, but not the ones he names; a licence appears in paragraph 2 only as part of a tax on motor cars.
Question 6 of 20 · Multiple Choice
What is Pigou's main point in Source 2, paragraph 3?
Answer: C
Pigou says "It is not sufficient to contrast the imperfect adjustments of unfettered private enterprise with the best adjustment that economists in their studies can imagine," because "we cannot expect that any State authority will attain, or will even whole-heartedly seek, that ideal." Choice A goes too far: he has just argued for intervention. Choice B is what he warns against. Choice D overreads the monopoly context of the section.
Question 7 of 20 · Multiple Choice
According to Source 2, paragraph 2, why are special taxes placed on businesses that produce and distribute alcoholic drinks?
Answer: A
Pigou writes that the trade net product "is unduly large relatively to the social net product" in these businesses, "Consequently, in nearly all countries, special taxes are placed upon these businesses." In today's terms, Pigou is arguing that some costs of drinking fall on people other than the buyers and sellers, so without a tax these businesses produce more than is best for society. Choice B reverses the reasoning. Choice C mixes up the two sources. Choice D is not in the passage.
Question 8 of 20 · Multiple Choice
Which Millbrook situation in Source 3 best fits Pigou's warning that "A loud-voiced part of their constituents, if organised for votes, may easily outweigh the whole"?
Answer: C
The downtown business association is an organized group that supports the levee, the option that protects its members. Pigou warns that such a group can sway a decision even if another option is better for the city as a whole. Choice A describes the analysis, not pressure. Choice B is a cost-sharing rule. Choice D explains why combined benefits overlap.
Question 9 of 20 · Multiple Choice
Use the table in Source 3. Which options pass the test in Source 1, benefits in excess of estimated costs?
Answer: B
Every row has benefits above costs: $66M against $48M, $45M against $30M, $21M against $9M and $60M against $39M. Passing the test only shows that each would improve on doing nothing; it does not pick among them. Choice A picks the option with the best return per dollar. Choices C and D leave out options that also pass.
Question 10 of 20 · Multiple Choice
Use the table in Source 3. Which choice has the greatest net benefit?
Answer: D
Net benefits are $18M for A ($66M - $48M), $15M for B, $12M for C and $21M for the combination ($60M - $39M). Choice A has the largest total benefits, but also the largest costs. Choice B, Option C, returns the most per dollar spent ($21M of benefits for $9M of costs), but a ratio is not the same as the size of the net gain. Choice C, Option B, is the best single option except the levee.
Question 11 of 20 · Multiple Choice
Why are the benefits of Options B and C combined less than the benefits of B plus the benefits of C?
Answer: B
Source 3 says both options "protect some of the same homes." A home bought out under B cannot also benefit from C's grants, so adding the two benefits ($45M + $21M = $66M) would count the overlap twice. Choices A, C and D are not in the source.
Question 12 of 20 · Multiple Choice
Use Source 3. How much would Millbrook pay if the city chose Options B and C combined?
Answer: B
The city pays 35% of the cost: 0.35 x $39M = $13.65M. Choice A takes 35% of the benefits ($60M) instead of the cost. Choice C is the federal share, 65% of $39M. Choice D takes 35% of the net benefit ($21M).
Question 13 of 20 · Multiple Choice
Use Source 3. If the city has already chosen Option B, what net benefit does adding Option C contribute?
Answer: C
Adding C raises benefits from $45M to $60M (+$15M) and costs from $30M to $39M (+$9M), so it adds $15M - $9M = $6M of net benefit, half of what C would add on its own. Choice A is C's net benefit alone, which ignores the overlap. Choice B is the combination's total net benefit. Choice D is the added benefit without subtracting the added cost.
Question 14 of 20 · Multiple Choice
Option B in Source 3 pays "fair market prices" for 120 homes. Why might its costs still be understated in the table?
Answer: A
A market price measures what a buyer would pay, not everything a long-time owner gives up, such as neighbors, a short trip to work or family history. Source 3 notes that some families "who have lived there for generations oppose the buyouts." Choice B contradicts the meaning of a fair market price. Choice C contradicts the 65% federal share. Choice D is not supported by the table.
Question 15 of 20 · Multiple Choice
Invented example: a factory's smoke does $4 of damage per ton of output to its neighbors. A $4 tax per ton cuts output from 10,000 to 9,000 tons a year, and the factory gives up $1,500 of value on the 1,000 tons it no longer makes. Which amount is a benefit to society as a whole?
Answer: D
Damage avoided on the 1,000 tons no longer made is 1,000 x $4 = $4,000, a real gain to the neighbors. Choice A (9,000 x $4) is a transfer from the factory to the government. Choice B is the damage before the tax, most of which still happens. Choice C is a cost to society, so the net gain is $4,000 - $1,500 = $2,500, before the cost of collecting the tax.
Question 16 of 20 · Multiple Choice
Suppose that ten years after Millbrook builds Option C on its own, an evaluation finds that it actually cost $14 million and produced $16 million in benefits. What should the evaluation conclude?
Answer: C
Actual net benefit is $16M - $14M = $2M, still positive but far below the estimated $12M. Choice A confuses an overrun with failure: the test compares actual benefits with actual costs. Choice B is wrong because benefits fell from the $21M estimated. Choice D is too strict: evaluations can use measured results to date and revised forecasts.
Question 17 of 20 · Short Answer
Write an evaluation of Option A (the levee) against Options B and C combined for Millbrook. Use net benefits, who gains and who pays, and one reason the estimates might be wrong.
Model answer: Both pass the test in Source 1, so the question is which does more good. Comparing net benefits in the table, the combination comes out ahead of the levee, and the city's share of its cost is smaller. The levee protects downtown businesses as well as the east side, which helps explain the business association's support, while the combination places heavy costs on the 120 families who would move. A levee's costs could rise, and a levee can encourage more building behind it, which raises the damage if it ever fails; buyout costs could also be higher if families need more help to move. On the numbers I would recommend the combination, with generous moving help, and I would check the results in ten years. Rubric: 1 point for correct net benefits; 1 point for gains and costs to specific groups; 1 point for a reason the estimates might be wrong; 1 point for a clear recommendation with reasons.
Question 18 of 20 · Short Answer
Invented example: studded snow tires wear grooves into pavement. A state starts charging a $50 yearly fee for each car that uses them, and collects $5 million in the first year. A legislator says, "The policy's benefit is the $5 million we collected." Explain the error, and say what an evaluation should count instead.
Model answer: The $5 million is a transfer: drivers who keep studded tires pay it and the state receives it, so society as a whole is no richer from the payment itself. An evaluation should count the real effects: the pavement damage avoided because some drivers switch to other tires, minus the value those drivers give up (for example, some loss of grip on icy roads) and the cost of running the fee. If few drivers switch, the fee raises money but does little to reduce damage. Rubric: 1 point for identifying the transfer; 1 point for naming the real benefit; 1 point for naming at least one real cost.
Question 19 of 20 · Short Answer
Use Pigou's warning in Source 2, paragraph 3, to describe two ways a real decision about flood control could fall short of the best policy an economist could design. Use Source 1 or Source 3 in your answer.
Model answer: First, ignorance: the engineers' estimates in Source 3 could be wrong, for example if construction costs rise or floods become more or less frequent than expected, so the chosen option might not have the greatest net benefit in practice. Second, sectional pressure: an organized group such as Millbrook's downtown business association, or a state that would get a project at little cost to itself, can push for an option that helps it more than the whole community. Source 1's requirement that local governments give land and run the works is one way to reduce that pressure, because the people asking for a project must pay part of it. Rubric: 1 point for each of two problems from Pigou explained with an example; 1 point for linking to Source 1 or Source 3.
Question 20 of 20 · Short Answer
Design an ex-post evaluation for the Millbrook option you would choose. What would you measure after ten years, and how would you decide whether the policy was effective?
Model answer: I would measure actual construction and upkeep costs; flood damage on the east side in each flood since the project, compared with damage in similar past floods; the number of homes flooded; insurance claims; use of the park, if built; and how the families who moved are doing. I would convert these into dollars where possible and compare actual benefits with actual costs. The policy is effective if actual benefits exceed actual costs and it does better than the other options would likely have done; I would also report any group that bore much more of the cost than expected. Rubric: 1 point for measures of costs; 1 point for measures of benefits with a fair comparison; 1 point for a clear rule for judging effectiveness.
0 of 20 answered · 0 correct
06
Frequently Asked Questions
10 Questions
What does D2.Eco.7.9-12 mean?
D2.Eco.7.9-12 asks high school students to judge whether government policies meant to improve market outcomes actually work, by weighing their benefits against their costs. The full text is "Use benefits and costs to evaluate the effectiveness of government policies to improve market outcomes." It belongs to the Exchange and Markets part of the C3 Framework's economics indicators for grades 9-12.
What kinds of government policies does this standard cover?
Any policy aimed at a market that falls short: public projects such as flood control, taxes or fees on activities that harm others, subsidies for activities that help others, rules about safety or information, and policies on competition. The standard does not ask students to favor more or less government; it asks them to measure whether a given policy does more good than harm.
What is the difference between a benefit-cost test and choosing the best policy?
A test asks whether one policy's benefits exceed its costs; choosing the best policy compares all the reasonable options. Several options can pass a test, and the one with the greatest net benefit is usually the strongest choice, subject to concerns about who pays. Comparing the added benefit and added cost of each larger option shows whether each step is worth it.
Why isn't tax or fee revenue counted as a benefit?
Because revenue moves money from one group to another without creating or using up real resources. Economists call it a transfer. A benefit-cost evaluation counts real effects, such as damage avoided, time saved, materials and labor used, and value people give up. Who gains and who loses the transferred money still matters for fairness, and evaluations report it separately.
Is the Flood Control Act of 1936 really a benefit-cost law?
Yes. Section 1 sets a condition for federal flood-control projects that compares their benefits with their estimated costs, and students analyze its exact wording in this lesson. The page quotes the Act from the Statutes at Large, the official printed collection of federal laws.
Who was A. C. Pigou, and why is he in this lesson?
Arthur Cecil Pigou was a Cambridge economist whose 1920 book The Economics of Welfare studied gaps between what a business earns and what it adds to society, and how a government might close them. The lesson also uses his warning that real governments are imperfect, so students weigh both sides.
Do students need to calculate present value for D2.Eco.7.9-12?
Not on this page. The examples give benefits and costs already converted to present value (today's dollars), so students can focus on comparing options. Advanced students can explore how a higher discount rate lowers the present value of benefits that come far in the future.
How is D2.Eco.7.9-12 different from D2.Eco.8.9-12?
D2.Eco.7.9-12 is about measuring a policy's effectiveness with benefits and costs. D2.Eco.8.9-12 is about describing a policy's possible consequences, both intended and unintended. The two work together: an evaluation is only as good as the list of consequences it counts.
Is this lesson about a current political debate?
No. The sources are a 1936 law and a 1920 economics book, and the city case is invented. The rubrics score the use of benefits, costs and evidence, so students who recommend different options can all earn full credit. Teachers can apply the same method to any policy their course studies.
What is a quick check for D2.Eco.7.9-12?
Give students three invented options for one problem with benefits and costs, plus one transfer and one sunk cost mixed into the list, and ask them to choose and defend a policy. Strong answers leave out the transfer and the sunk cost, compare net benefits and name who pays.
07
Related Standards
5 standards
These standards connect to D2.Eco.7.9-12: prerequisites to review first, parallel standards at the same level, and next steps that build on it.
Before this lesson
D2.Eco.2.9-12Prerequisite
Use marginal benefits and costs to argue for or against a solution
Evaluate the choice of monetary and fiscal policies in different conditions
Lesson coming soon
Standard text: National Council for the Social Studies (NCSS), The College, Career, and Civic Life (C3) Framework for Social Studies State Standards: Guidance for Enhancing the Rigor of K-12 Civics, Economics, Geography, and History (Silver Spring, MD: NCSS, 2013). NCSS was not involved in the production of this lesson and does not endorse it.
