Identify the correct statements from the following:
(A) According to environmental valuation theory, option value = future use value + bequest value + vicarious value.
(B) Adverse selection leads to market failure.
(C) Contingent valuation method is a type of cost-benefit analysis.
(D) Public good and common goods have the same characteristics.
(E) Internal rate of return is a criterion in cost-benefit analysis.
Choose the correct answer from the options given below

Correct option is C

Correct Answer: 3. (A), (B), (E) only.
Explanation:

• Statement (A) is Correct: Option Value is broadly interpreted as the value placed on preserving a resource for potential future benefits. This "Total Option/Preservation Value" aggregates:
  
  • Future Use Value: The option for the individual to use it later.
  • ​Bequest Value: The option for future generations to use it.
  • Vicarious Value: The value derived from knowing others can use it.
    
• Statement (B) is Correct: Adverse Selection is a type of market failure caused by asymmetric information where one party has more information than the other before the transaction occurs (e.g., in health insurance, high-risk individuals are more likely to buy insurance, driving up premiums and driving out low-risk individuals).
  
• Statement (E) is Correct: The Internal Rate of Return (IRR) is a standard decision criterion used in Cost-Benefit Analysis (CBA). A project is generally considered economically viable if its IRR exceeds the social discount rate.
  

Information Booster:

• Weisbrod (1964): Introduced the concept of Option Value, arguing that standard CBA underestimates the value of preservation if it ignores the uncertainty of future demand.
  
• Market Failure Types: Besides Adverse Selection, others include Moral Hazard, Externalities, and Information Asymmetry.

Additional Information:

• Statement (C) is Incorrect: The Contingent Valuation Method (CVM) is a specific survey-based technique used to estimate the monetary value of non-market goods (like clean air). It is a tool used within a Cost-Benefit Analysis to generate data, but it is not a "type" of CBA itself.
  
• Statement (D) is Incorrect: Public Goods and Common Goods have different characteristics regarding Rivalry:
  
  • Public Goods: Non-Excludable and Non-Rival (e.g., Streetlight).
    
  • Common Goods: Non-Excludable but Rival (e.g., Fish in a public lake—one person's catch reduces the stock for others).