9781118041581

FIGURE 11.4

A Benefit-Cost Analysis

of Building a Bridge

The bridge should be

built because its

projected net benefit

is positive.

to continue at this level indefinitely, the resulting net present value is 10/.04 

$250 million.^18

Now let’s consider the benefit-cost calculation for the bridge in Figure 11.4.

The first line under the bridge’s accounting shows the adverse effect on

the ferry; it is put out of business, so its profit is zero. The last two lines

show the burden on taxpayers; they must foot the bill for the construction

and maintenance costs of the bridge. Because the bridge charges no toll, it

478 Chapter 11 Regulation, Public Goods, and Benefit-Cost Analysis

(^18) The present value of a perpetual annuity is PV CF/r, where CF is the annual cash flow and r
is the yearly interest rate. In the present example, it probably would be more realistic to predict
annual traffic (on the ferry or the bridge) to grow at some rate per year, (g). In this case, the pres-
ent value is given by PV CF/(r g).
Dollars per Trip
Consumer
surplus
$5 million
Trip demand:
P = 4 – .4Q
Ferry's profit
$5 million
0
$4
3
P = 2
AC = 1
5 10
Q
Millions of Trips
F
B
Ferry Operator
Bridge Commuters
Taxpayers
Net Present Value
$ 5.0 (profit)
$ 5.0 (consumer surplus)
$ 10.0
$125
$125
$250
$290
$ 0
$500
–$125
–$ 85
Annual Flow
Ferry Operator
Ferry Commuters
Ferry:
Bridge:
Alternative Affected Groups
$ 0.0 (profit)
$ 20.0 (consumer surplus)
–$ 5.0 (maintenance cost)
(capital cost:)
TOTAL NET BENEFIT
TOTAL NET BENEFIT
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