A medium-sized city is considering increasing its airport capacity. At the current airport, flights are frequently delayed and congestion at the terminal has limited the number of flights. Two mutually exclusive alternatives are being considered. Alternative A is to construct a new airport 65 kilometers from the city. Alternative B is to enlarge and otherwise upgrade the current airport, which is only 15 kilometers from the city. The advantage of a new airport is that there are essentially no limits on its size. The disadvantage is that it will require travelers to spend additional travel time getting to and from the airport. There are two disadvantages in upgrading and enlarging the current airport. One disadvantage is that the increase in size is limited by existing development. The second disadvantage is that the noise of airplanes in a new flight path to the current airport will reduce the value of homes near that flight path. A thousand homes will be affected, with the average loss in value about $25 000. Such losses are large enough that it is not reasonable to expect that the owners' losses will be offset by gains elsewhere. If the city wishes to ensure that their losses are offset, it must compensate these owners. Note that such compensation would not be an additional social cost. It would merely be a transfer from taxpayers (through the government) to the affected owners. Benefit and cost data are shown in the following Table. Activat Effect Improved Service/Year Alternative A New Airport (Millions of $) Alternative B Current Airport (Millions of $) 55 28.5 Increased Travel Cost/Year 15 0 Cost of Highway 50 50 10 Improvements Construction Costs 150 115 Reduced Value of Houses 0 25 25