A town council is considering building a new bridge over a small river that runs

Question

A town council is considering building a new bridge over a small river that runs through the town to reduce congestion in the existing bridge and decrease commute times. Each of the estimated 1,000 commuters who would use the bridge would experience a benefit of $15 a day in savings over current commute times. The government would finance the bridge through an increase in property taxes to the amount of an additional $1 per day for each of the 10,000 households. Would the bridge pass a cost-benefit analysis test? What is the impact on the local economy by building the bridge? Would opening this up to private enterprise increase or decrease competition, and raise or lower the cost of the bridge (and maybe negating part of the tax per household)?

What if a private company, such as Weyerhaeuser, were to take on the project instead of the government? How would the concepts of open access, club, and public goods be impacted, if at all? Finally, if Weyerhaeuser were to build this instead of the government and absorb many of the costs using proprietary information, would this then be more innovative than the more traditional route to building the bridge?  

Explanation / Answer

Here benefit=1000*15=$15000; and cost=1*10000=$10000. Benefit outweigh the cost so the bridge pass a cost-benefit test.

building the bridge be a Pareto improvement (relative to not having a bridge) as each of 1,000 commuters who must cross the bridge would experience a benefit of $15 per day from saving commuting time. It is pareto improvement as everyone get more benefit from this than cost.

Toll is a charge for using the bridge in this case which will depend on varity of things and will vary from person to person.If no one want to use it government can not collect any tolls and they will incur a loss. But in case of property tax government can collect tax from every single individual. So using tolls to finance the bridge does not yield a pareto improvement

If a car consist of 4 people and crosses the bridge. Toll will charge on this car only not on 4 people in this car individually. As MC=0 so if 1 person pay the toll the other 3 will be free rider. It is not a pareto efficient as there is market failure for presence of free rider. Again demand downword sloping means if toll increase then demand for crossing this bridge will decrease. Government can not finance the cost of building the bridge.

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