A government is considering paving a highway with a newly developed “wear-proof “material. Paving the highway would cost $2 billion today, but it would save $300 million in maintenance costs for each of the next 10 years. Use the concept of present value to determine whether the project is worth undertaking if the government can borrow at an interest rate of 5%. Is it worth it if the interest rate is 0%? 10%? A politician says to you, “I don’t care what the interest rate is. The project is clearly a good investment: it more than pays for itself in only 7 years, and all the rest is money in the bank.” What’s wrong with this argument, and why does the interest rate matter?
Answer to relevant QuestionsTable 4-1 in the textbook shows the remarkable difference across generations in their likely net tax payments to the federal government. What is responsible for these large intergenerational differences? How do you think population growth affects the degree of “generational balance” in government finance? Can an activity generate both positive and negative externalities at the same time? Explain your answer. The marginal damage averted from pollution cleanup is MD = 200 – 5Q. The marginal cost associated with pollution cleanup is MC = 10 + Q. a. What is the optimal level of pollution reduction? b. Show that this level of ...In which way could smoking exert a positive externality on others?
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