A City Is Deliberating Whether to Undertake a Major Infrastructure

Essay

A city is deliberating whether to undertake a major infrastructure investment to provide free, high-speed WIFI internet access within its city limits. Alternatively, the city could rely on the private sector to provide access. The city estimates internet demand to be P = 20 - 5Q, where Q denotes number of users (in millions) and P is price per month in dollars. The emerging private market for internet access is considered to be highly competitive, and the typical provider exhibits LAC = LMC = $5 per subscriber per month, where LAC is long-run average cost and LMC is long-run marginal cost. According to the city's estimates, the initial cost for constructing the high-speed network is $600 million and network maintenance costs are $80 million per year. Prepare a benefit-cost analysis to guide the city's decision. Assume that the public and private alternatives will last indefinitely, and that each will be held to a 5% discount rate.