Exercise 3. Suppose that Government is currently evaluating a project that envisages building a temporary bridge across the river. This bridge will serve the public for one year. It has been estimated that this project requires a total investment of 9 million euros, while the opportunity cost of resources employed in the construction of the bridge is estimated to be 7.5 million euros. According to environmental study, the environmental damage from this temporary bridge is expected to be 1 million euros. It has been also estimated by analysts that each bridge-crossing by a vehicle causes 1 euro of costs to the society. The estimated demand for bridge-crossings during the lifetime of this temporary bridge is described by the demand function:

C = 10 2PC, where C denotes the number of bridge-crossings in millions and PC denotes the fee (in euros) charged per crossing.

Suppose that the social discount rate as well as the inflation rate are zero during the year of construction as well as the year of operation of this bridge. Suppose also that the Government can not borrow any funds for the construction of this bridge.

Furthermore, suppose that there are only two possible options for the Government to finance the construction of this bridge:

1) alternative 1: to impose an excise tax of 1 euro per unit of goodX, or

2) alternative 2: to impose an excise tax of 2 euros per unit of goodY.

Suppose that the excise tax considered can be established for one year only.

The annual demand in the market for good X is described by the demand function Xd = 10 2PXd, where Xddenotes the quantity of good X demanded (in millions) and Pxd denotes the demander price (i.e. the price paid by consumer) per unit of good X (in euros). The annual supply in the market for good X is described by the supply function Xs = 8Pxs, where Xs denotes the quantity of good X supplied (in millions) and Pxs denotes the supplier price (i.e. the price received by the supplier) per unit of good X (in euros).

The annual demand in the market for good Y is described by the demand function Yd = 20 5PYd, where Yddenotes the quantity of good Y demanded (in millions) and Pyd denotes the demander price per unit of good Y (in euros). The annual supply in the market for good Y is described by the supply function Ys = 5Pys, where Ys denotes the quantity of good Y supplied (in millions) and Pys denotes the supplier price per unit of good Y (in euros). Given this information and restrictions imposed, would the construction of the bridge be justified from the societys point of view? If the Government should implement this bridge-building-project, then which of the goods good X or good Y should be taxed in order to obtain neccessary funds for the implementation of this project? Justify your answers and provide all the neccesary calculations for proof!