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Evaluating a Public Project 477

better than the alternative of regulating the private transport market? Would

private investment and control of the bridge be a still better alternative?

Public Investment in a Bridge

A task force of state and city planners is considering the construction of a har-

bor bridge to connect downtown and a northern peninsula. Currently, resi-

dents of the peninsula commute to the city via ferry (and a smaller number

commute by car, taking a slow, “great circle” route). Preliminary studies have

shown there is considerable demand for the bridge. The question is whether

the benefit to these commuters is worth the cost.

The planners have the following information. The ferry currently pro-

vides an estimated 5 million commuting trips annually at a price of $2 per

trip; since the ferry’s average cost per trip is $1, its profit per trip is $1. The

immediate construction cost of the bridge is $85 million. With proper main-

tenance, the bridge will last indefinitely. Annual operating and maintenance

costs are estimated at $5 million. Plans are for the bridge to be toll-free. This

will price the ferry out of business. The planners estimate that the bridge will

furnish 10 million commuting trips per year. The discount rate (in real

terms) appropriate for the project is 4 percent. Based on this information,

how can the planners construct a benefit-cost analysis to guide its invest-

ment decision?

The simplest way to proceed is to tabulate one benefit-cost analysis for the

status quo (the ferry) and another for the bridge and determine which deliv-

ers the greater net benefit. Figure 11.4 shows the demand curve for commuter

trips from the peninsula and the resulting benefit-cost calculations for the ferry

and bridge. The demand curve shows that, at the ferry’s current $2-per-trip

price, 5 million trips are taken (point F). If a toll-free bridge is built, 10 million

trips will be made (point B). The planning board believes demand is linear;

consequently, the demand curve is Q  10 2.5P, or equivalently, P  4  .4Q,

where Q is measured in millionsof trips.

Now we can use the demand curve to compute net benefits for the ferry

and bridge alternatives. Let’s start with the ferry. Currently, the ferry deliv-

ers benefits to two groups: the ferry itself (its shareholders) and commuters.

As indicated in Figure 11.4, the ferry’s annual profit is (2.00 1.00)(5) 

$5 million. How do we measure the commuters’ collective benefit? As for

any good or service, this benefit takes the form of consumer surplus—the dif-

ference between what consumers are willing to pay and the actual price

charged. The triangular area between the demand curve and the $2 price

line (up to their point of intersection at 5 million trips) measures the total

consumer surplus enjoyed by ferry commuters. The area of this triangle is

given by (.5)(4.00 2.00)(5) $5 million. Thus, the sum of profit plus con-

sumer surplus is $10 million per year. Supposing this benefit flow is expected

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