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Which of the following best explains why public investment in infrastructure such as roads and power is often described as having a 'crowding-in' effect on private investment?

Public infrastructure investment crowds in private investment because it lowers logistics and input costs and raises expected returns on private projects, encouraging firms to invest more. This is the opposite of crowding out, where government borrowing pushes up interest rates and reduces private investment.

  1. AIt raises interest rates so private firms borrow less
  2. BIt lowers the productivity and raises the cost of private production
  3. CIt reduces logistics costs and raises returns on private projects, encouraging more private investmentCorrect
  4. DIt replaces private firms entirely in the market

Explanation

Better roads, power and ports cut transport and input costs and raise expected profitability, so private investment rises alongside public spending. Crowding out is the opposite idea, where government borrowing raises interest rates and reduces private investment.

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