A city XYZ is considering a plan to expand capacity along ex

A city XYZ is considering a plan to expand capacity along existing toll roads and build new roads as well. Once complete, the projects will decrease congestion and save travel time, but consumers will pay higher tolls to fund the project.

a) Assuming that the labor market for road construction workers is competitive and that labor supply is not perfectly elastic, use a graph to illustrate the budgetary costs and opportunity costs of the project. Label all relevant points and areas. Do budgetary outlays overstate, understate, or equal opportunity costs?

b) Name two possible secondary markets that might be affected by this project. Under what circumstances should policymakers consider surplus changes in these markets when evaluating the gross benefits of the project?

Solution

tolls are just user fees, and user fees are not only efficient, they are fair. it is better than taxes to pay for highway expansion or new highways.only economists realize that congestion is really a response to under pricing and educated economists realize that it is a response to the lack of property right in roads, which is something we’re going to get to. As long ago as 1924, the economist Frank Knight pointed out that if urban roads were privately owned, and if the owners could charge prices for them, there would not be excessive congestion.