Contents xixMARKET FAILURE DUE TO EXTERNALITIES 455
Remedying Externalities 458
Promoting Positive Externalities 464
MARKET FAILURE DUE TO IMPERFECT INFORMATION 467
II. BENEFIT-COST ANALYSIS AND PUBLIC GOODS
PROVISION 470
PUBLIC GOODS 471
Public Goods and Efficiency 471
THE BASICS OF BENEFIT-COST ANALYSIS 474
Applying the Net Benefit Rule 474
Dollar Values 475
Efficiency versus Equity 475
EVALUATING A PUBLIC PROJECT 476
Public Investment in a Bridge 477
VALUING BENEFITS AND COSTS 480
Market Values 480
Nonmarketed Benefits and Costs 480SECTION III: Decision-Making
Applications 497
CHAPTER 12 Decision Making under Uncertainty 499
UNCERTAINTY, PROBABILITY, AND
EXPECTED VALUE 500
Expected Value 502
DECISION TREES 503
An Oil Drilling Decision 503
Features of the Expected-Value Criterion 506
SEQUENTIAL DECISIONS 511
RISK AVERSION 519
Expected Utility 522
Expected Utility and Risk Aversion 527CHAPTER 13 The Value of Information 541
THE VALUE OF INFORMATION 542
The Oil Wildcatter Revisited 542
Imperfect Information 544
REVISING PROBABILITIES 547
Bayes’ Theorem 548
OTHER APPLICATIONS 551
Predicting Credit Risks 552
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