Examine which of two plans is more economically efficient

Reference no: EM132198916

Question: The city of X plans to build a new bridge across the river separating the two halves of the city for use by its residents. It is considering two plans for financing this bridge. Plan A calls for the bridge to be paid for out of tax revenues, allowing anyone to use the bridge for free. Plan B calls for imposing a toll of $6 for crossing the bridge, with the remainder of the cost to be paid out of tax revenues. There are no maintenance costs for the bridge. City planners estimate a demand curve for hourly use of the bridge to be Q = 1,800 - 100P. The bridge will be able to accommodate 2,000 cars per hour without congestion.

a. Demonstrate which of the two plans is more economically efficient, and explain why.

b. Suppose that bridge traffic was so great that each car entering the bridge imposed on opportunity cost on other drivers of $5. How might your answer to (a) be affected by this traffic congestion on the bridge?

Reference no: EM132198916

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