Question

1. The city of Gadsden, Alabama (where Noah’s parents live) is considering replacing one of the bridges that cross the Coosa River that runs through town. The primary benefits of replacing the current bridge are reductions in commute time, traffic, and better foot traffic safety for people walking across the bridge. The expected cost of the bridge is $8 million. The expected benefits from primary sources over the coming years are $4 million immediately, and $1 million each year over the next 4 years. Discuss the cost-benefit analysis associated with this project. Is it possible to improve the cost-benefit analysis? Is anything missing from it?. Should the city go forward with the project? Why or why not?

Answer 1

Expected cost of replacing the bridge is $8 million. Whereas expected benefits from primary sources are $4 million immediately and $1 million each year over the next 4 years. Which makes the total expected benefits $8 million equal to the expected cost.

Thus based on the cost benefit analysis, the project is break even according to the tangible benefits and costs which are measurable. But in cost benefit analysis there are also intangible benefits or costs associated with a project which measures the customer satisfaction, user experience and opportunity cost.

Thus one can improve the cost-benefit analysis by analyzing the intangible benefits availed, wherein the bridge will be used by more number of people because of the efficiency and reduction in commute time, this will ultimately make the customers much more satisfied and increase their level of productivity which will ultimately increase the output of a firm or an economy. Enhanced user experience because of greater quality infrastructure so that toll collection improves much more than expected. Opportunity cost wherein the city would have spent much more on maintaining the old bridge over the years, reducing customer satisfaction and usage of the bridge.

Thus if one gets to quantity the intangible benefits by taking into consideration increase in the level of output of that town because of the new bridge, and if the output increased tremendously, then the city should go ahead with the project. Because without the replacement of the bridge, the output wouldn't have increased.