The city council pays $42,000 to an interstate firm to construct a barbeque area with a kid’s playground on otherwise vacant land. The firm hires $22,000 of unskilled labour at the minimum wage. Th
The city council pays $42,000 to an interstate firm to construct a barbeque area with a kid’s playground on otherwise vacant land. The firm hires $22,000 of unskilled labour at the minimum wage. The cost of materials used (which are in addition to current supply) to construct the facility was $4,000, including $800 in federal sales tax (a distortionary tax). Depreciation on the firm’s capital equipment was $1,200 and interest on pre-existing debt during construction was $1,500. The firm paid an extra $2,000 in federal company tax as a result of undertaking the project. The council is to charge a fee to users of the barbecue area, with a present value of $20,000. A survey to local residents indicates that non-market value of the facility has a positive benefit to families with a present value of $30,000 however with pollution effects of $2,000. In the absence of the barbecue project the labour employed to construct the facility would otherwise be unemployed and would receive from the federal government unemployment benefits totalling $2,000. The value of the non-market activity of the labour is estimated to be 20% of the market wage. All stakeholders except the interstate firm are part of the Referent Group.
i. Calculate the aggregate net benefit of the project according to:
a. the Market CBA
b. the Private CBA
c. the Efficiency CBA
d. the Referent Group CBA
ii. Calculate the distribution of the Referent Group net benefits among the following stakeholders:
(c) the council
(d) the federal government;
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