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Proposals for building a road

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Reference no: EM132502975

A small town mayor has two proposals for building a road. The first is to let a private company build the road, and the second is for the local government to make it. The fixed cost of the road is $2 million, while its maintenance cost is 0. The mayor knows that the road's demand looks like this:

Price per vehicle ($) Traffic (000s)

8 0

7 100

6 200

5 300

4 400

3 500

2 600

1 700

0 800

a. Should the company or the local government be awarded the contract for the road? Show your working, including the P, Q, and profit in each case.

b. When the mayor announces the winner of the contract, a journalist immediately questions her decision to build the road in the first place. As economic assistant to the mayor, you calculate the benefit from building the road to silence the journalist. What is the benefit/loss to society of building the road?

Reference no: EM132502975

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