The city of Animaltown plans to build a new bridge across the river separating the two halves of the city for use by its residen
ts. 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 freely. 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. City planners estimate a local demand curve for hourly use of the bridge to be Q = 1,800 – 100P. The bridge will be able to accommodate 2000 cars per hour without congestion. Which of the plans is more efficient, and why? How would your answer change if congestion was predicted on the bridge?
1 answer:
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Explanation:
It is given that in the market there are four equal-sized firms that produce similar products. The market is saturated such that 10% industry-wide price rise would lead to 18% decline in units sold by all firms in the industry. Going further, there is a proposed legislation that imposes a tariff on a key input used by the industry, which on realization would result in the increase in marginal cost by $2.
This means that the market elasticity of demand is:
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