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Does the City Project Meet the Pareto Efficiency Criterion?

Stanley Ryan, Your Supervisor

Read the following scenario and then answer the Problem Demonstration Questions below.

The allocation of resources relates to both business and government. State, local, and federal governments could use the Pareto efficiency criterion to measure the effectiveness of the government's reallocation of resources. A reallocation of resources is a potential Pareto improvement project if, and only if, the gains could potentially exceed the losses.

You and Stanley Ryan, your supervisor and accountant in your consulting firm, need to prepare a Pareto efficiency criterion for a city project. Use the available resources below to decide whether or not the project will produce desirable gains.

The City Public Works Project will cost $900,000 and will benefit five different sections of the city. The City Benefit and Cost Share per Section is listed in the table below.

Section	City Benefit ($)	Cost Share ($)
1	100,000	75,000
2	200,000	250,000
3	300,000	350,000
4	100,000	50,000
5	200,000	100,000

If the total projected benefits exceed the total project cost, then the project is economically feasible.

The project would meet the Pareto efficiency improvement criterion if the cost-benefit for each section of the city exceeds the cost-share. For example, Section 1 is met because the benefit of the section is greater than the cost-share of $75,000. However, in Section 2, the City Project would not meet the Pareto criterion because the Cost Share exceeds the City Benefit. Thus, the City Project would be approved in a city-wide referendum by a majority vote, although only for Sections 1, 4, and 5, because Sections 2 and 3 do not meet the Pareto criterion.

Problem Demonstration Questions

Answer the following questions by typing your answer underneath the questions, and then click on View Answer. With a total benefit of $900,000 for the city, and a total project cost of $825,000.

1. Is this project economically feasible for the city?

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2. Does the project meet the Pareto efficiency improvement criterion?

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3. Would this project be approved by a majority at a city referendum?

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Scenario: Benefits of Social Problems

A community public works project will cost $60,000 and will benefit five different individuals.

Individual	Individual Benefit ($)	Individual Cost ($)
1	1,500	2,000
2	5,500	5,000
3	5,000	6,000
4	25,000	21,000
5	28,00	29,000

Assignment Details

Important!

It is expected that the assignment will be completed using an Excel spreadsheet using formulas.

1. Is this project economically feasible? Please show work in an Excel spreadsheet that lists the benefit for each individual.
2. Would this project be approved by a majority at a majority at a referendum?
3. Does this project meet the Pareto efficiency improvement criterion?
4. If possible, revise the cost shares to allow the project to meet the Pareto criterion and to pass a referendum.

Answer & Explanation Solved by verified expert

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