Summary 491each bridge. It has decided to repair those bridges with the greatest
benefit-cost ratios until its budget is exhausted. Does this strategy
make sense? Explain carefully.- A city must decide whether to build a downtown parking garage (for up
to 750 cars) and what rate to charge. It is considering two rates: a flat
$1.50-per-hour rate or an all-day rate averaging $1 per hour (based on a
$10 daily rate and an average 10-hour stay). Parking demand is Q 900
300P, where Q is the number of cars in the garage each hour and P is the
hourly rate. The capital cost of the garage is estimated to be $20 million
and its annual operating cost to be $.62 million (regardless of the
number of cars utilizing it) over its estimated 40-year life. The city’s
discount rate is 8 percent. At 8 percent, $1 per year for 40 years has a
present value of $11.90. (Use the factor of 11.9 to multiply yearly net
benefits to obtain a present value.)
a. Sketch the demand curve (per hour) and calculate total benefits—the
sum of consumer surplus and revenue—from the garage under either
rate. (Multiply by 10 hours per day and 260 working days per year to
find annual values.) Should the city build the facility? If so, which of
the two rates should it charge?
b. Could a private developer profitably build and operate the garage?
Which of the two rates would it set? (Assume it faces the same
demand, costs, and discount rate as the city.) - An industrial state has been generating increasing amounts of hazardous
waste and is considering construction of a waste treatment facility. The key
question is where to site it. The attitude of most cities and towns toward the
facility is “Not in my backyard!” Under state law, towns have the absolute
right to refuse such a facility. The state is encouraging private waste disposal
companies to negotiate with towns that might be willing to accept the
facility. The table summarizes annual benefits and costs (in millions of
dollars) associated with the five leading sites. Only onesite will be chosen for
the facility. Note that the state’s industries as a whole will benefit from
having an in-state facility. In addition, the sites offer the developer potential
profits, but will generate substantial costs for the host towns.
Site
Affected Groups A B C D E
State Industry 44 323
Developer’s:
Revenue 12 12 12 12 12
Cost 6 9 7 7 8
Host Town’s Cost 7 5 4 8 2c11RegulationPublicGoodsandBenefitCostAnalysis.qxd 9/29/11 1:34 PM Page 491