Question

A new publicly financed bridge is expected to reduce the cost of auto travel between two areas by Php1 per trip. This cost reduction to motorists consists of a reduction in travel time, auto depreciation and petrol expenses totaling Php1.50 per trip, less the Php0.50 bridge toll which the government will collect. Before the bridge was built there were 1 million trips per year between the two areas. Once the bridge is in operation, it is estimated that there will be 1.5 million trips per year between the two areas. In terms of areas under the demand curve, what is the annual benefit of the bridge:

To motorists?

To the government?

What other referent group benefits would need to be considered in a social benefit/cost analysis?

Answer 1

SOLUTION

Before the bridge was constructed the cost of travel was high. After the construction of the bridge, the cost of the bridge would reduce by Php 1.

After the construction of the bridge,the motorist has to bear the following cost.

Bridge toll= Php 0.5

Reduction in the cost travel by the motorist= Php 1.5

Number of travel before the bridge was constructed= 1 million

Number of travel after the bridge was constructed= 1.5 million

therefore, cost incurred by the motorist before the bridge was constrcted= Php(1.5*1) million =Php 1.5 million

cost incurred by the motorist after the bridge was constrcted= Php(0.5*1.5) million = Php 0.75 million

Net benefit by the motorist = (1.5-0.75) = Php 0.75 million

Net benefit by the Government= (0.5*1.5)= Php 0.75 million

(Previously the Govt didn't earn anything hence Php 0.75 million is the total benefit)

here, both the motorist and the Govt benefits from the construction of the bridge. The motorist reached to the destination in less time. The pollutiom emission also decreases to some extent as less fuel is being burnt.