Question

A town council is considering building a new bridge over a small river that runs through the town to reduce congestion on the existing bridge and reduce commuting times. Each of 1,000 commuters who must cross the bridge would experience a benefit of $20 per day from saving commuting time. The bridge would be financed through increased property taxes that amount to $1 per day for each of the 40,000 households in the town.

 Would the bridge pass a cost-benefit test?

 Would building the bridge be a Pareto improvement (relative to not building the bridge)?

 Could using tolls instead of taxes to finance the bridge yield a Pareto improvement?

 Would using tolls be Pareto efficient? (Assume that the marginal cost of using the new bridge for an extra trip is zero and assume the demand for trips across the bridge is downward-sloping.)

Answer 1

Ans. 1. Benefit = 1000 × $20 = $20000 and Cost = $1 × 40000 = $40000 , Hence the bridge doesn't pass a cost benefit test.

2. No , it won't be pareto improvement because cost outweighs the benefit.

3. Yes , because then the cost would be levied from the commuters only.

4. Yes , because the MC for an extra trip is 0 and hence the commuters would be able to travel from that bridge without any extra cost , this leads to pareto efficiency.

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