Solving Essays

Custom Academic Papers

100% Original, Plagiarism Free, Customized to your instructions!

Some Rough Cost-Benefit Numbers for a “Bridge to Nowhereâ€

Some Rough Cost-Benefit Numbers for a “Bridge to Nowhereâ€

Some Rough Cost-Benefit Numbers for a “Bridge to Nowhere”A widely publicized federal earmark in the 2006 transportation appropriation bill was $223 million for abridge intended to provide access to Ketchikan, Alaska’s airport on lightly populated Gravina Island. Theproject had the misfortune to become labeled the “Bridge to Nowhere” when the earmark came to lightin the 2008 presidential campaign. It is possible to do some rough cost-benefit analysis on the project.Gravina Island has a population of around 50, so most of the bridge traffic would likely be those usingthe airport. The island was not inaccessible without the bridge. A ferry serves the island, with ferriesleaving every half hour. The primary impact from the bridge would be to reduce travel time on the trips.It has been estimated that the drive to the airport from Ketchikan would take 13 minutes, compared to27 minutes by ferry. Therefore, the time saving is around 15 minutes per passenger. Ketchikan is a portfor cruise ships, which dock on the mainland, so some of the bridge traffic would be ship passengerseither joining or leaving the cruise ships. Airline enplanements/deplanements (total passengers comingand going through the airport) are on the order of 400,000, so that traffic would create 800,000crossings of the bridge. But let’s be generous and round up to 1,000,000 crossings, each saving aroundone quarter hour by taking the bridge.How much is the time saving worth? Let’s assume that each visitor earns $125,000 in income per year. Ifthe visitor works 50 weeks per year and 40 hours per week, then the work year is 2,000 work hours.Some visitors are children and some are retired—and the earning level assumed here is much higherthan the national average—but let’s not worry about that. Work it out with different estimates on yourown, if you wish. With these numbers, the value of work time equals $62.50 per hour. But this is leisuretime for most of the traffic, not work time, so let’s adjust the value downward by 50 percent (probablyan underadjustment) to get an estimate of the value of leisure time—$31.25. Each passenger saves 15minutes with the bridge (compared with travel by ferry), so the saving per passenger equals $7.81.Multiply that by 1 million passengers to get $7,810,000.We will assume that the bridge will last forever and will have no maintenance cost and that 3 percent isa reasonable discount rate (that’s lower than the OMB rate of 7 percent, but probably higher thancurrent market interest rates). Divide $7,810,000 by 0.03 (because benefits are perpetual—the value islower if we use a finite life for the bridge) to get the present value of the services from the bridge of$260.4 million, a large number and, as it turns out, larger than the amount of the appropriation. (If youare uncomfortable with perpetual life, use 100 years and the annuity formula to get a present value ofservices: (7.81/0.03)[1 − (1/1.03)100] 5 $246.8 million.)But that is not the end of the story. In order to make the bridge functional, the state of Alaska has tospend $165 million in addition to the federal government’s $233 million. Summing up, the present valueof the benefits of the bridge is at most $260.4 million, but its total cost is $398 million.Consider These Questions1. Would you consider the bridge to be a worthwhile use of federal resources? Why or why not?2. Why might the state of Alaska be interested in getting the bridge built, even though the total cost ofthe bridge exceeds the present value of the benefits from the bridge? From the standpoint of Alaska,what are the relevant costs and benefits?3. How do the benefit-cost analysis results change if the discount rate is 7 percent? What about 2percent?4. The analysis is made with several assumptions about use of the bridge, value of traveler time, andnumber of visitors. How would the analysis change with alternate assumptions that you believe to bepotentially reasonable?

Can't find what you are looking for?

Post your question on solvingessays and get help from one of our expert tutors in topics ranging from mathematics to rocket science!