A new publicly financed tunnel under the Brisbane River is expected to reduce the cost of auto travel between two suburbs on either side of the river. The local government is considering the introduction of a $3 tunnel toll. The cost reduction to motorists consists of a reduction in travel time, auto depreciation and petrol expenses totalling $7.00 per trip. Before the tunnel was built there were 3 million trips per year between the two areas. Once the tunnel is in operation it is estimated that there will be 5.5 million trips per year between the two areas.
(i) In terms of areas under the demand curve based on the information given, what is the estimated annual benefit of the tunnel:
- (a) to motorists?
- (b) to the local government?
(ii) List two other costs and/or benefits that should be included in a CBA of the tunnel project?
(iii) In 2 to 3 lines explain why the 'before vs. after' assumption in this case could give a misleading estimate of the project's benefits.