Question

A business improvement district is considering the installation of a new light- ing system for the district. If the lighting system is installed, all the businesses in the area will benefit, and there will be no way in which a business that does not pay for a share of the system can be denied full benefits from the system. The system will cost $4,000 and will benefit the five members of the district as follows: Individual Benefit (in $) A 1,500 B 1,500 C 700 D 600 E 600 Cost Share (in $) 800 800 800 800 800 a. Is the project economically feasible? b. Would any individual business be willing to install the lighting system (and pay for it) by itself? c. Would the project be approved by a majority of the businesses at a referendum? d. Does the project as currently structured meet the Pareto criterion? e. If possible, revise the cost shares to allow the project to meet the Pareto crite- rion and to pass a referendum.

Answer 1

Answer a) Economical feasibility of project : Total benefit to all parties - Total cost = 4900 -4000 = $ 900.

Answer b) No , as none of the business house has benefit more than 4000 ( cost of the system).

Answer c) Pareto concept of economical optimal distribution, in economy resources may not be redistributed for ones better off without at least one entity worse off. But the concept of Pareto efficiency says that resources should be distributed in the most economically efficient way ,not in equality.

The current structure of cost distribution is not as per optimal economical efficient manner. as the cost is same for all by dint of huge gap in benefits.

Answer d) The cost should be redistributed with the same ratio as benefits , like

A:B:C:D:E :: 15:15:7:6:6

so, share of A and B should be equal = 15/49*4000 = $ 1224.49

Share of C= 7/49*4000 = $ 571.43

Share D and E should be equal = 6/49*4000 = $489.80