City of Bloomville decides to establish a fire department and tobuild a new firestation. At present, firefighting services inBloomville are provided by the neighboring metropolitan city of SanAngeles, for which Bloomville pays San Angeles $1.2 million a year.It costs San Angeles $1 million a year toprovide services. It isalso estimated that the firefighting services provided by SanAngeles prevent $800,000 worth of fire damage to property inBloomville a year.
The proposed new station will cost $7 million to construct andthe city will need to initially procure three firetrucks. TheBloomville city council estimates that the personnel costs (wagesto firefighters, paramedics, etc.) will be $500,000 a year. Inaddition, two new trucks will need to be purchased: one truck inyear ten (10) and another one in year twenty (20) to meet theincreasing demand of the growing city.
It is also estimated that, since the fire station will belocated within the Bloomville city limits, the average responsetime will be significantly lower, which will decrease propertydamage from fire by $300,000 dollars a year (i.e. total estimatedfire damage prevented will be $1.1 million a year with the in-cityfire station).
The useful life of the proposed station is 30 years. Assume noinflation and use a discount rate of 7%. Onefire truck costs $1million.
a. Should the new station be constructed if the accountingdomain is the city of Bloomville?
b. Suppose that you are asked to perform a Cost-Benefit Analysisin a more competent fashion and includethe entire society in theaccounting, will you still recommend the fire station constructionproject.
Note: Since you are not asked to evaluate distributional impactsof the proposed projects, but rather its total neteffect, you doNOT have to construct a Kaldor-Hicks Tableau for (a) and (b) (butyou may).
City of Bloomville decides to establish a fire department and tobuild a new firestation. At present, firefighting services inBloomville are provided by the neighboring metropolitan city of SanAngeles, for which Bloomville pays San Angeles $1.2 million a year.It costs San Angeles $1 million a year toprovide services. It isalso estimated that the firefighting services provided by SanAngeles prevent $800,000 worth of fire damage to property inBloomville a year.
The proposed new station will cost $7 million to construct andthe city will need to initially procure three firetrucks. TheBloomville city council estimates that the personnel costs (wagesto firefighters, paramedics, etc.) will be $500,000 a year. Inaddition, two new trucks will need to be purchased: one truck inyear ten (10) and another one in year twenty (20) to meet theincreasing demand of the growing city.
It is also estimated that, since the fire station will belocated within the Bloomville city limits, the average responsetime will be significantly lower, which will decrease propertydamage from fire by $300,000 dollars a year (i.e. total estimatedfire damage prevented will be $1.1 million a year with the in-cityfire station).
The useful life of the proposed station is 30 years. Assume noinflation and use a discount rate of 7%. Onefire truck costs $1million.
a. Should the new station be constructed if the accountingdomain is the city of Bloomville?
b. Suppose that you are asked to perform a Cost-Benefit Analysisin a more competent fashion and includethe entire society in theaccounting, will you still recommend the fire station constructionproject.
Note: Since you are not asked to evaluate distributional impactsof the proposed projects, but rather its total neteffect, you doNOT have to construct a Kaldor-Hicks Tableau for (a) and (b) (butyou may).
