valuation of benefits and costs 1
DESCRIPTION
VALUATION OF BENEFITS AND COSTS 1. WHEN MARKETS CLEAR. First Questions First. Is there a market failure that could justify government action? Does it matter? What would happen without government intervention? What should government do? Different answers? Which is better?. - PowerPoint PPT PresentationTRANSCRIPT
VALUATION OF BENEFITS AND COSTS 1
WHEN MARKETS CLEAR
First Questions First
• Is there a market failure that could justify government action?
• Does it matter?- What would happen without government
intervention?- What should government do?- Different answers? Which is better?
Next Come Valuation Questions
• Is the demand schedule linear (or can we reasonably assume it is)?
• Do we have to worry about income effects?
ASSUMING THE ANSWERS ARE YES AND NO• Does the market clear?• Are costs constant?• Are there market imperfections?
Valuation: No Distortions
DSS’QQ’PP’Constant Costs
Valuation: No Distortions
DSS’QQ’PP’Increasing Costsefabcgh
Valuation: No Distortions
DSS’QQ’PP’Increasing Costsefabcgh
Valuation: Distortions
DSS’QQ’PP’Constant CostsD’abce
Valuation: Distortions
DSS’QQ’PP’Increasing Costsefabcghji
D’
Cost of Resources: No Distortions
DSQQ’PConstant CostsD’
Cost of Resources: No Distortions
DSQPPerfectly Inelastic Supply
D’P’acbDWL
Cost of Resources: No Distortions
DSQQ’PP’Increasing CostsD’abce
Cost of Resources: No Distortions
DSQQ’PP’Increasing CostsD’abce
Cost of Resources: No Distortions
DSQQ’PP’Increasing CostsD’abce
Cost of Resources: No Distortions
DSQQ’PP’Increasing CostsD’abce
Cost of Resources: Distortions
DSMCQQ’PConstant CostsD’
Cost of Resources: Distortions
DSQQ’PP’Increasing CostsD’abceMCfg
Project Cost Example
The marginal cost of supplying concrete is MC=0.01Q,Where Q=1 million cubic yards of concrete. Becausethe supplier has a local monopoly, concrete isactually sold according to the supply curve P=0.02Q.
The inverse (private) demand for concrete is P=6-0.04Q,Which implies the following demand, Q=150-25P.Solving for Q, P, CS & PS, we have:6-0.04Q = 0.02Q6 = .06Q, 100 = QP = .02(100) = $2.00CS = 100M(6-2)/2 = $200M, PS = 100M[(2+1)/2] = $150M
DS100QP246MC
Adding the project
The project will require 50M cubic yards of concrete, adding 50Q to Q=150-25P, gives us Q=200-25P or an inverse demand function of P=8 -.04Q. Once again, solving for Q, P, private consumption, CS, and PS, we get:
8 = .06Q, 133.33M = Q, P = $2.67Private demand = 133.33M - 50M = 83.33M
(of course 2.67 = 6 -.04Q = 83.33 = Q)CS = .5[83.33(6-2.67)] = $138.89M, -$61.11M
PS= 133.33[(2.67+1.33)/2] $266.67M, +$116.67MBudget cost = $2.67*50M = -$133.33M
DS100QPD’246MC2.6783.33133.33ConsumerSurplus loss
Consumer surplus loss = $61.11M
DS100QPD’246MC2.6783.33133.33ProducerSurplus gainOld producerSurplus
Producer surplus gain = $116.67M
DS100QPD’246MC2.6783.33133.33Old producerSurplusTransfer to producerfrom consumersBudgetary Costof project
Budgetary cost of project =-$133.33M
DS100QPD’246MC2.6783.33133.33ProducerSurplus gainOld producerSurplusTransfer to producerfrom consumersSocial costof project
Net cost of project = -61.11 - 133.33+116.67 = -77.77 or [(100 83.33)(2+2.67)/2]+[(133.33-100)*(1.33+1)/2] =38.88+38.89 = -77.77