Answer to Question #112339 in Macroeconomics for Ayman Rizwan

Question

A small town mayor has two proposals for building a road. The first is to let a private company build the road, and the second is for the local government to make it. The fixed cost of the road is $2 million, while its maintenance cost is 0.

Answer 1

discuss options

1. If the local government does this, then it will be government spending that will create jobs, and this will further increase aggregate demand, which will contribute to economic growth.
2. If it is to be built by a private company, it will be an investment that will also contribute to an increase in aggregate demand in the future, which will contribute to economic growth. New jobs will also appear and plus a private company will pay more taxes. This option will be more profitable for the local government, as the road will be built at the expense of private capital, new jobs will be created and more taxes will be budgeted.
3. There may also be a third option: the road can be built by a private company along with local government. the effects are the same as the first two options. This option will be suitable when the state and private company do not have enough money to implement the project.

The most preferred second option, ceteris paribus. And so the first option and the third option, when there is not enough funds for the project