9781118041581

Could a private firm profitably build and operate the bridge? Assume it faces the same

costs and interest rate as the government. In addition, the private bridge is expected to

share the market with the ferry, unless it prices the latter out of business. What toll should

the private bridge operator charge? Can it realize a profit?

VALUING BENEFITS AND COSTS

The main issues with respect to valuing benefits and costs concern the role of

market prices and ways of valuing nonmarket items.

Market Values

In most cases, market prices provide the correct values for benefits and costs.This result is

exactly what one would expect in light of the discussion in Chapter 7. There, we

saw that competitive markets are efficient. In such markets, the price of the good

or service is an exact measure of its marginal benefit to consumers and its mar-

ginal cost to producers: P MB MC. For instance, if construction of the bridge

requires 50,000 cubic yards of concrete and the price of concrete is $100 per

cubic yard, the total cost of this input is $5 million. The same principle applies

to the cost of any input to production—capital, labor, land, and so on. It also

applies to valuing the benefits of program outputs. For instance, suppose the

chief benefit of constructing a water project is the irrigation of new tracts of land.

The market value of water would represent the dollar benefits of the project.^19

Nonmarketed Benefits and Costs

One gains a renewed appreciation for the role of market prices when one con-

siders the difficulties in valuing nonmarketed items. For instance, how can we

judge the benefits of public schools? Should performance be judged by aver-

age test scores? dropout rates? Indeed, educators agree there are no ideal per-

formance measures. Because public education is provided collectively (i.e.,

financed out of local tax revenues), there is no “market” value for this essen-

tial service. Parents do not pay market prices for their children’s education.

Contrast these difficulties with the problem of valuing education provided by

private schools. Here the value is clear; it is at least as much as the price par-

ents actually pay in tuition. There is no need to study the determinants of

school performance; the market price is enough. If a private school fails to

deliver a quality education, parents will stop paying the high market price.

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

CHECK

STATION 4

(^19) In some cases, market prices may be “distorted” so they do not accurately reflect the social mar-
ginal costs and benefits. For instance, the presence of monopoly, externalities, and taxes all cre-
ate distortions, requiring valuation adjustments to any benefit-cost analysis.
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