Question

Hennepin county is considering building several public ice skating rinks for the winter season. Analysts have estimated the present values of the following effects over the expected useful life of the rinks:

Present Value (millions)

Federal Government grant                   10

Construction and maintenance costs   35

Personnel costs                                   15

Contributions from county residents    3

Contributions from non residents         2

Benefit to county residents                  40

Benefit to non residents                       20

Termination value                                 5

The Federal Government grant is only available for this purpose. Also, the construction and maintenance will have to be done by an out-of-county firm while all personnel will come from inside the county. Finally, the termination value of the project represent the value to the county from using some of the rinks resources during summer and future winters (tents, furniture, video cameras, ice skates, diminish training cost for staying personnel, etc.)

(a)Assuming national-level standing, what are the social net benefits of the project?

(b)Assuming county-level standing, what are the social net benefits of the project?

(c)How would a guardian in the county budget office calculate net benefits?

(d)How would a spender in the county parks and recreation department calculate benefits?

Answer 1

a) At national level you consider both benefits to county and non-county residents.

So social net benefits of the project = (40 + 20) -(3+2) = 55 millions

b) At county level you consider only benefits to county residents.Non-county residents benefits are excluded.

So social net benefits of the project = 40 - 3 = 37 millions

c) A guardian in the county budget office calculate net benefits by not considering the social benefits to non-county residents.

So net benefits = 40+10 + 5 - 35 -15 =  5 millions

d)  A spender in the county parks and recreation department calculate benefits by considering the social benefits to both county and non-county residents.

So net benefits = 10 +40 + 20 + 5 + 3 - 35 -15 = 28 millions