Q: Can the government grant permits to block off streets, or allow construction that hinders the public?
A: One is not allowed to ruin a public thoroughfare, but the government can grant permission to block off streets, since the roads belong to the government. It is questionable, though, whether one may initially place a request for a permanent permit (C.M. 162:1; Pischei Teshuvah 162:3).
Similarly, one is not allowed to dig a hollow under public roads lest the cover fall in and people get injured. Nonetheless, Rema writes that this is permitted nowadays, since this is the common practice. Furthermore, the streets belong to the municipality, and we do whatever they grant permission for (C.M. 417:1).
Aruch Hashulchan (C.M. 417:5) bases this on dina d’malchusa. However, this is permissible only upon receiving a permit from the governing body, but otherwise it is not allowed, even if one could receive a permit. With a permit, even construction that is not commonly done is allowed (Pischei Choshen, Nezikin 8:).