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Benefits and Costs of Subsidies

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The purpose of government subsidies is to encourage activities that are deemed to have positive spillovers. A professional sports team, for example, is thought to increase tax revenues and increased demand for local businesses.

Choose to discuss another good or service for which government provides a subsidy. Include each of the following in your initial post.

1. Describe the subsidy program and explain what spillovers are generated from the subsidy.

2. Explain how both consumer and producer surplus will be affected by the subsidy. Will they increase or decrease?

3. Who are the winners (i.e. increased surplus) and losers (loss of surplus) that result from the subsidy? Remember that there are always trade-offs, and therefore, someone must be the loser.

Try not to choose an item that a classmate has already discussed. In your responses to classmates, help them identify other possible spillovers.

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A good example of subsidized public good is the public highway system. Highways are subsidized by Federal Government funds, paid for by taxes. A great free highway system is vital for a modern economy because easy convenient transportation is vital to the movement of goods from suppliers to consumers and for citizens to commute to work, go on a vacation, visit friends and family, etc. Just think of all the companies that require the highways to deliver their goods, farmers to deliver ...

Solution Summary

This solution uses the highway system and the entire transportation system as an example of a subsidizes public good paid for by taxes. He compares the pros and cons of such a subsidized good for the public.

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Monetary Impact, Cost Benefit and Additional Benefit

1. Identify one each (1) benefit, (2) disbenefit, and (3) monetary cost that would impact each of the following projects:
a. A new electrical distribution station in a developing part of the city, with feeds from the city power plant and from a regional electrical grid
b. Annexation of an adjoining semirural area into the city limits
c. Replacement of old school buses
d. Renovation of rest stops having only picnic tables to now including clean restrooms, protected open-air shelters for picnics, designated pet-walking areas, and ample parking
e. A new stadium/coliseum for sporting events

2. A City has determined that building a new water distribution system using a new source of water would have an annual costs of $5,750,000 and annual net benefits of $4,250,000. The contentious issue is how to measure the benefits versus cost when it involves a federal government subsidy of 70% for the new system. The annual benefits (forever) are estimated at $4,250,000 and the annual operating costs are $250,000. The initial cost is estimated at $71,875,000 and the city uses a rate of 8% in their calculations.
The council members agree that the project has a very long time span and converting values to annual equivalents (perpetuities) is correct. They do not agree on how to include the government subsidy in their evaluations.
a. Determine the benefit - cost and benefit/cost ratios from a local perspective?
b. Determine the benefit - cost and Benefit/Cost values from the standpoint of an impartial citizen outside the community.

3 Lincoln Park Zoo in Chicago is considering a renovation that will improve some physical facilities at a cost of $1,800,000. Addition of new species will cost another $310,000. Additional maintenance, food, and animal care and replacement will cost $145,000 in the first year, increasing by 3 percent each year thereafter. The zoo has been in operation since 1868 and is expected to continue indefinitely; however, it is common to use a 20-year planning horizon on all new investments. Salvage value on facilities after 20 years will be 40 percent of initial cost. Interest is 7 percent. An estimated 1.5 million visits per year are made to the zoo, and the cost remains free year-round. How much additional benefit per visit, on average, must the visitors perceive to justify the renovation?

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