Reference no: EM133088576

Public Park Example:

All the residents in a particular neighborhood get together and decide to build a neighborhood park. They determine that the cost of building the park ($450,000) and maintaining it for a year ($50,000) comes to $200 per resident (2500 residents). Because the individuals in the neighborhood believe that they will each derive $300 in value annually from the park, they decide to build it. Everything goes as planned. In the first year, the neighborhood collects $500,000 from residents, and then builds the park. Revenue from the park in Year 1 is $0. From an accounting perspective, therefore, the park "loses" $50,000 (maintenance costs) and the cost of the fraction of the park that is "used" during the year (let's assume a 30-year amortization, so $15,000) for a total loss of $65,000 in its first year of operation.

Has any economic value been created? Why or why not? There is a nearby for-profit water park that was profitable during the same time period. Is the neighborhood park more or less "efficient" than this water park? Finally, does the neighborhood need to rethink its business model as a result of its $65,000 dollar loss in Year 1?