Uncertainty between Marginal and Average

Suppose that the government has just set up and built three new roads that had total cost of $30 million. The average price for each road was $10 million. Then an economist goes in and analyzes the benefits of the roads by doing a study on them and estimates that the benefit for the economy will be of $36 million, which means that it would be an average of $12 million per road.

Then let us suppose that there is a politician that is attempting to build a fourth road, and argues that since the roads cost on average $10 million, it would be foolish not to build another road. Should this be considered? After all, if each road reports a $2 million net gain to society, you will probably want to continue building roads for eternity.

The key factor here however is the marginal costs and the marginal benefits, not the average. Nobody cares about how much the costs and benefits all the other roads gave. You would have to compare the costs of an additional road or marginal with the benefits of that additional or marginal road. This road could be built but if the marginal costs overcome the marginal benefits, it should not be built.

An example of this could be a commission of independent surveillance hires an engineer to estimate the cost of building another road as well as an economist to estimate the benefits. Imagine that the engineer finds that since the three roads that have been built are already taking up the space that was needed, and in order to build another road they would have to break into a big rocky hill, in this type of case the costs would increase as special machinery would need to be used to break down this hill.

At the same time the economist does a study and finds that a fourth road is not really necessary. In the best of the cases, it would only bring in $8 million annually in benefits. In this type of case, the additional road should not be built because it has an additional marginal cost of probably around $15 to $20 million which exceed the marginal benefit of $8 million. Politicians that only tell their voters about the costs and benefits of previous roads that were built, the politician supporting the project is indeed tricking the voters. So make sure to look into it when these types of proposals come up.