Suppose that a $100 public project is to be financed by the sale of bonds to the public.

Purchasers of the bonds increase savings by $80 and reduce private investment by $20.

The only tax in the economy is a 50% business income tax.

i Work out the opportunity cost to the economy of raising the $100 in public funds.

ii The cost premium on public funds represents a deadweight loss to the economy.

Which group in the economy bears this cost? Explain.