MEMORIAL UNIVERSITY OF NEWFOUNDLAND

ECONOMICS
(Economics 4120)
Applied Welfare Econ & Cost Bene…t Analysis
Roberto Martínez-Espiñeira

Assignment 1 [20 pts each]

Problem 1 Let there be three evenly sized communities in society who vote on
whether the government should undertake a particular environmental project.
Let the bene…ts of this project be $150, $140 and $50 for communities A, B and
C respectively.
1) If the project costs $300 and these costs are to be shared equally, would
a majority of communities vote to undertake the project? What would be
the net bene…t to each community under such a scheme? Would total net
bene…ts be positive?
2) Suppose that the costs of the project increased to $360 and that, once
again, the costs were to be shared equally. Would a majority of commu-
nities still vote for the project, and would total net bene…ts be positive?
If community votes could be bought and sold in a free market (perish the
thought :) ), how would this a¤ect your answers to 1) and 2)?
Problem 2 Imagine a society where only two individuals live. Joe has $124
and Mary has only $1. They both (surprisingly enough) enjoy having money.
Is this allocation of money e¢ cient? If not, how could money be reallocated to
achieve an e¢ cient allocation in this society?
Problem 3 A person’s demand for gizmos is given by the following equation:1

q=6 0:5p + 0:0002I

where q is the quantity demanded at price p when the person’s income
is I.
Assume initially that the person’s income is $40,000.
a. At what price will demand fall to zero? (This is sometimes called
the choke price because it is the price that chokes o¤ demand.)
b. If the market price for gizmos is $10, how many will be de-
manded?
c. At a price of $10, what is the price elasticity of demand for
gizmos?
d. At a price of $10, what is the consumer surplus?
e. If price rises to $12, how much consumer surplus is lost?
f. If income were $60,000, what would be the consumer surplus loss
from a price rise from $10 to $12?
1 From Boardman et al. (2008), Ch. 2.

1
Problem 4 Imagine that you live in a city that currently does not require bi-
cycle riders to wear helmets. Furthermore, imagine that you enjoy riding your
bicycle without wearing a helmet.2

From your perspective, what are the major costs and bene…ts of a proposed
city ordinance that would require all bicycle riders to wear helmets?
What are the categories of costs and bene…ts from society’s perspective?

Problem 5 Your town is considering building a public curling rink. Analysts

have monetized the following e¤ ects estimated over the expected useful life of the
rink:

Monetized Value
(million dollars)

Provincial grant: 2.2

Construction and maintenance costs: 12.5
Personnel costs: 8.2
Revenue from fees paid by town residents: 8.6
Revenue from fees paid by non-residents: 2.2
Use value to town residents: 16.6
Use value to non-residents: 3.1
Scrap value: 0.8

The provincial grant is only available for this purpose. Also, the construction
and maintenance will have to be done by an out-of-town …rm.
a. Assuming national-level standing, what are the social net bene…ts of the
project?
b. Assuming town-level standing, what are the social net bene…ts of the
project?
c. How would a guardian in the town budget o¢ ce calculate net bene…ts?
d. How would a spender in the town recreation department calculate bene-
…ts?

2 From Boardman et al. (2008), Ch. 1.