The city council pays $42,000 to an interstate firm to construct a barbeque area
ID: 391746 • Letter: T
Question
The city council pays $42,000 to an interstate firm to construct a barbeque area with a kid’s playground on otherwise vacant land. The firm hires $22,000 of unskilled labour at the minimum wage. The cost of materials used (which are in addition to current supply) to construct the facility was $4,000, including $800 in federal sales tax (a distortionary tax). Depreciation on the firm’s capital equipment was $1,200 and interest on pre-existing debt during construction was $1,500. The firm paid an extra $2,000 in federal company tax as a result of undertaking the project. The council is to charge a fee to users of the barbecue area, with a present value of $20,000. A survey to local residents indicates that non-market value of the facility has a positive benefit to families with a present value of $30,000 however with pollution effects of $2,000. In the absence of the barbecue project the labour employed to construct the facility would otherwise be unemployed and would receive from the federal government unemployment benefits totalling $2,000. The value of the non-market activity of the labour is estimated to be 20% of the market wage. All stakeholders except the interstate firm are part of the Referent Group.
i.) Calculate the aggregate net benefit of the project according to:
a. the Market CBA
b. the Private CBA
c. the Efficiency CBA
d. the Referent Group CBA
ii.) Calculate the distribution of the Referent Group net benefits among the following stakeholders:
(a) consumers (b) labour (c) the council (d) the federal government
Explanation / Answer
1) Private CBA
Revenue to Interstate Firm
42000
Cost to intersate Firm
30700
Cost of material
4000
Direct labour
22000
Depriciation
1200
Interest
1500
Tax
2000
Benefit
11300
2) Market CBA
Revenue (non market facilty)
30000
Cost (Fee paid to city council)
20000
Pollution Effect
2000
Total cost
22000
Benefit
8000
Efficiency CBA
Non Market value of labour
4400
Expenses incurred (benefit from federsl govt)
2000
Benefit
2400
Referent group CBA
Revenue from public by city council
20000
Fedral tax revenue
2000
sales tax authority
800
Revenue for supplying material
4000
Revenue from loan repayment by interstate firm
1200
Revenue for supplying labour
22000
Revenue from consumer (positive benefit)
30000
Total revenue
80000
Cost incurred for payment to interstate firm
42000
Pollution
2000
Cost incurred to city council
20000
Total Cost
64000
Benefit
16000
Benefit Distribution of Referent group
Consumer
6000
Federal
560
Labour
4400
City council
4000
Total Benefit distirbution (A)
14960
Benefit to other stake holder
Material Supply firm
800
Bank
240
Total Benefit distribution (B)
1040
Total Benefit distribution (A+B)
16000
Revenue to Interstate Firm
42000
Cost to intersate Firm
30700
Cost of material
4000
Direct labour
22000
Depriciation
1200
Interest
1500
Tax
2000
Benefit
11300
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