Suppose the Chinese government decides to tender the construction of a

paid highway to connect two cities. The winning company incurs

on highway construction costs, but may take a toll

to earn income. The government knows that the cost of offering the service

it will be less if only one road is built. In the design of the tender

consider two options for awarding the contract:

i) Hold a competitive tender for the contract and award it to the company

that offers the highest payment to the government.

ii) Hold a competitive tender for the contract and award the contract to the

company offering to charge the lowest toll.

Compare both alternatives in terms of equilibrium price and production

and choose the one that generates the lowest social cost. Justify your answer.