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Lecture Notes ECON 437/837: ECONOMIC COST-BENEFIT ANALYSIS Lecture Six. ECONOMIC VALUATION OF TRADABLE GOODS & SERVICES. Applying the Postulates to Determine Economic Evaluation of Tradable Goods and Services.

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Lecture Notes ECON 437/837: ECONOMIC COST-BENEFIT ANALYSIS Lecture Six

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Lecture notes econ 437 837 economic cost benefit analysis lecture six

Lecture Notes

ECON 437/837: ECONOMIC COST-BENEFIT ANALYSIS

Lecture Six


Economic valuation of tradable goods services

ECONOMIC VALUATIONOF TRADABLE GOODS & SERVICES


Applying the postulates to determine economic evaluation of tradable goods and services

Applying the Postulates to Determine Economic Evaluation of Tradable Goods and Services

  • The framework for the estimation of economic prices was presented for the case of non-tradable goods.

  • They are also applicable to the valuation of tradable goods.

  • The methodology for the estimation of the economic prices of internationally tradable goods and services when there are distortions in their markets is also based on the three postulates.

  • These distortions may include customs duties on imported inputs of a project or those imported items that the project output will replace or substitute.


Tradable commodities

Tradable Commodities

A good or service is considered tradable when an increase in demand (or supply) by a project does not affect the amount demanded by domestic consumers.

  • An increase in demand for an IMPORTABLE commodity results in an increase in demand for imports.

  • An increase in demand for an EXPORTABLE commodity results in a reduction in exports.

  • An increase in supply of a tradable commodity by a project will cause either a reduction in imports or an increase in exports.

    An Importable commodity includes imported goods and domestically produced goods that are close substitutes for imported goods.

    An Exportable commodity includes exported goods and close substitutes for exported goods.


Tradable commodities cont d

Tradable Commodities (cont’d)

  • There are usually more internationally traded goods and services than non-traded goods and services in economy.

  • Smaller countries tend to have more traded goods and services than large countries. Small countries cannot produce many goods and services efficiently.

  • The public sector tends to produce non-traded goods and services but uses many traded goods and services as inputs.

  • E.g., when analyzing infrastructure projects that produce domestic services, the techniques for the economic valuation of tradable goods are important for determining the economic cost of inputs to the project.


Classification of a project s outputs and inputs

Project

Outputs

Inputs

Tradable

Non-Tradable

Tradable

Non-Tradable

Importable

Exportable

Importable

Exportable

Classification of a Project’s Outputs and Inputs


Measuring the economic values of tradable goods four cases

Measuring the Economic Values of Tradable Goods: Four Cases

  • Economic cost of importable input

  • Economic value of importable good production

  • Economic value of export production

  • Economic cost of exportable input


Importable good

Price

S

domestic supply

Distorted World Supply Price

Pm

Em* PCIF* (1+Tm) + Fm

D

domestic demand

Quantity per year

so

do

Q

Q

so

do

Imports = Q - Q

Em= Market Exchange Rate

Fm = Domestic Freight to Market

Tm = Rate of Import Tariff

PCIF= Price of imports at entry point to country, including international freight and insurance charges expressed in units of foreign currency

Importable Good


Lecture notes econ 437 837 economic cost benefit analysis lecture six

Price

S domestic

Em * PCIF * (1+Tm) + Fm

S world

D w/project

D domestic

Qs0 Qd0 Qd1

Quantity

Project Demands More of an Importable Good

Project requirements will be met by additional imports (world supply). Domestic consumption is not affected.


Project purchases importable inputs

Project Purchases Importable Inputs

Input subject to Import Tariff

D

Price

0+P

S

D

0

0

= Em

d

w

P

P

(1+t)

World Supply

After Tariff

Em

w

P

World Supply

Quantity

0

s

Q

d

d

Q

Q

0

1

0

Financial cost is EmPw (1+t) (Q1d - Q0d)

Economic cost is EmPw(Q1d – Q0d) + Foreign exchange premium


Lecture notes econ 437 837 economic cost benefit analysis lecture six

Estimating the Economic Prices of Tradable Goods

  • 1. Adjust for commodity - specific trade distortions

  • Financial prices for the commodities demanded (or supplied) by a project must be adjusted for commodity-specific distortions and costs that drive a wedge between their international prices and their domestic market prices.

  • Taxes and subsidies are transfers between consumers, producers, and the government. Therefore, they are not part of the real resources consumed or produced by a project.

  • 2. Value the foreign exchange at the economic (shadow) exchange rate (Ee)

  • Multiply the CIF and FOB prices at the border by the economic price of foreign exchange (Ee).

  • Alternatively, add a foreign exchange premium [(Ee/Em) – 1], per unit of foreign exchange demanded (or supplied) by a project.

  • 3. Adjust for handling and transportation costs

  • The economic costs of handling and transportation that are necessary to move commodities to or from the point of entry must be included.

  • In the case of imported commodities, these costs should be added to the CIF price.

  • In the case of exported commodities, these costs should be subtracted from the FOB price.


Lecture notes econ 437 837 economic cost benefit analysis lecture six

Visayas Communal Irrigation Project

  • Basic Facts

  • The National Irrigation Administration (Philippine National Agency) proposes to rehabilitate 55 damaged communal irrigation systems and to build 25 new systems in Visayas.

  • The project’s additional components include water protection and erosion control, the strengthening of irrigation association, and the development of agricultural extension services.

  • The goal of the project is to alleviate poverty, while improving environmental sustainability of the region.

  • The life of project is 20 years.

  • The economic benefits arise from the increased production of rice and corn, which must otherwise be imported.

  • The foreign exchange premium is 24.6%.

  • The project is expected to cost approximately 480.91 million pesos (US$19.78 million).

  • The project will be financed with US$15.1 million loan from the International Fund for Agricultural Development, and remaining funding would be provided by the Philippine government.


Project uses an importable good pesticides

Project uses an Importable Good (Pesticides)

(+)

(+)

(+)

Importer Depot, Manila

Port, Manila

Local Market

Farm

Transport

Transport

Transport

Tariff, Port Charges


Lecture notes econ 437 837 economic cost benefit analysis lecture six

Economic Cost of Importable Goods:

With Tariff, Trade Margin and Domestic Freight

Em


Table 1 project uses an importable good pesticides

Table 1: Project Uses an Importable Good (Pesticides)


Measuring the economic values of tradable goods four cases1

Measuring the Economic Values of Tradable Goods: Four Cases

  • Economic cost of importable input

  • Economic value of importable good production

  • Economic value of export production

  • Economic cost of exportable input


Lecture notes econ 437 837 economic cost benefit analysis lecture six

Price

Sdomestic

S w/ project

Em * PCIF* (1+Tm) + Fm

S world

D domestic

Qs0 Qs1 Qd0

Quantity

Project Supplies More of an Importable Good

Project reduces quantity imported. No change in domestic consumption.


Project supplies an importable good rice

Project Supplies an Importable Good (Rice)

Rice Mill

(-)

Wholesaler, Manila

Pre-milled (paddy)

Ex-milled (rice)

(+)

Transportation

(-)

Paddy equivalent (65%)

Milling cost

Port, Manila

Transportation & handling

Trading margin

Grain dealer margin

Transportation & handling

Price of rice at the port

Farm

Farm-gate price of paddy


Table 2 project supplies an importable good rice

Table 2: Project Supplies an Importable Good (Rice)


Measuring the economic values of tradable goods four cases2

Measuring the Economic Values of Tradable Goods: Four Cases

  • Economic cost of importable input

  • Economic value of importable good production

  • Economic value of export production

  • Economic cost of exportable input


Exportable good

Price

S

domestic supply

Em* PFOB* (1-tx) - Fx

Distorted World Demand Price

Pm

D

domestic demand

Quantity per year

do

so

Q

Q

so

do

Exports = Q - Q

Em= Market Exchange Rate

tx = Export Tax

Fx = Freight and Trading Costs to Port

PFOB= Price of exports at point of export from country in units of foreign currency

Exportable Good


Lecture notes econ 437 837 economic cost benefit analysis lecture six

Price

S domestic

S w/ Project

Em * PFOB * (1-tx) - Fx

D world

D domestic

Qd0 Qs0 Qs1

Quantity

Project Supplies More of an Exportable Good

Project increases exports. Domestic consumption remains unchanged.


Project produces exportable goods subject to export tax no domestic transportation costs

Project Produces Exportable Goods subject toExport Tax (No domestic transportation costs)

Em

Pd=EmPw(1-t)

Financial benefit is EmPw (1-t) (Q1s-Q0s)

Economic benefit is EmPw(Q1s – Q0s) + Foreign exchange premium

Economic values of exportable goods are based on the FOB values of demand for exports


Irri supply an exportable good seeds

IRRI Supply an Exportable Good (Seeds)

(-)

IRRI Gate

Port

Port charges Transportation


Table 3 irri supply an exportable good seeds

Table 3: IRRI Supply an Exportable Good (Seeds)


Measuring the economic values of tradable goods four cases3

Measuring the Economic Values of Tradable Goods: Four Cases

  • Economic cost of importable input

  • Economic value of importable good production

  • Economic value of export production

  • Economic cost of exportable input


Lecture notes econ 437 837 economic cost benefit analysis lecture six

Price

S domestic

Em * PFOB * (1-tx) - Fx

D world

D w/ Project

D domestic

Qd0 Qd1 Qs0

Quantity

Project Demands More of an Exportable Good

Project requirements will reduce quantity exported. Consumption of previous consumers remains unchanged.


Project uses an exportable good seeds

Project Uses an Exportable Good (seeds)

(+)

Local Market

IRRI Exporter

(-)

(+)

TransportationDealer’s margin

Transportation

Port Handling Transportation

Port, Manila

Farm


Table 4 project uses an exportable good seeds

Table 4: Project Uses an Exportable Good (Seeds)


Lecture notes econ 437 837 economic cost benefit analysis lecture six

Summary

Economic Cost of Imported Input =

CIF (adj. for economic exchange rate) + Economic Cost of Freight from Port to Project

Economic Value of Importable Good Production =

CIF (adj. for economic exchange rate) + Economic Cost of Local Freight from Port to Market - Economic Cost of Local Freight from Project to Market

Economic Value of Exportable Production =

FOB (adj. for economic exchange rate) - Economic Cost of Local Freight from Project to Port

Economic Cost of Exportable Input =

FOB (adj. for economic exchange rate) + Economic Cost of Local Freight from Export Producer to Project - Economic Cost of Local Freight from Export Producer to Port


Lecture notes econ 437 837 economic cost benefit analysis lecture six

Additional Examples on

Calculation of Tradable Goods


Example 1 the import of pneumatic tires with an import duty

Example 1: The Import of Pneumatic Tires (with an import duty)


Example 2 the export of shoes with an export subsidy

Example 2: The Export of Shoes (with an export subsidy)


Example 3 the export of garments with an export tax

Example 3: The Export of Garments (with an export tax)


Measurement of economic prices of non tradable goods

MEASUREMENT OF ECONOMIC PRICES OF NON-TRADABLE GOODS


Non tradable commodities

Non-Tradable Commodities

  • A good or service is considered non-tradable when its domestic price is determined by local demand and supply.

  • An increase in demand (or supply) by a project could affect the amounts demanded by domestic consumers (or produced by other suppliers).


Defining a price of non traded good or service

Price

S

domestic supply

Distorted World Supply Price

Em * PCIF * (1+Tm) + Fm

Pm

Distorted World Demand Price

Em * PFOB* (1-tx) - Fx

D

domestic demand

Quantity per year

Defining a Price of Non-Traded Good or Service

  • Goods and services whose domestic production satisfies all the domestic demand for these items and whose domestic prices are not affected by their world prices are referred to as non-traded goods.

Domestic price


Lecture notes econ 437 837 economic cost benefit analysis lecture six

  • Steps to Estimate the Economic Value of a Non-Tradable Good or Service

  • 1)Adjust for distortions in the market for the item (whether input to, or output of, the project).

  • Adjustment for distortions in market where demand is being diverted towards or away from (wd).

  • Correct for distortions in the markets for the inputs used to produce the item. Correction is applied to the proportion of the item produced by other suppliers in the market (ws).

  • Correct for the foreign exchange premium and the shadow price of non-traded outlays (SPNTO) on tradable and non-tradable components of the non-tradable good or service.


General formula for the estimation of the economic prices of non tradable goods and services

General Formula for the Estimation of the Economic Prices of Non-Tradable Goods and Services

This formula can be used to estimate the economic price of a non-tradable good, that is either an input used by a project or an output produced by it.


Step one adjusting for distortions in the market for good or service

Step One: Adjusting for Distortions in the Market for Good or Service


Step one adjusting for distortions in the market for good or service1

Step One: Adjusting for Distortions in the Market for Good or Service

Value of postponed consumption

Value of additional resources

S0

Pz

B

S0+subsidy

C

M

P1d=P1m (1+tz)

L

P1s=P1m/(1-kz)

G

P0d=P0m (1+tz)

N

J

R

P0s=P0m/(1-kz)

U

P1m

H

D0

E

P0m

Dn+P

Dn

A

Q1d

Q1s

Q0

Q2d

Qz

0

Economic Costs for Project Input

(Input production subsidized and a sales tax is levied on input)

Financial Cost is P1m (Q1d-Q1s) Economic Cost is Q1dMGQ0 + Q0RLQ1s

Example

Wxs = 0.25, Wxd = 0.75, P0m = 90, t = 0.15, k = 0.4

P1s = 90/(1-0.4)=150, P1d = 90 (1+0.15) = 103, Pe = 0.25(150)+0.75(103) = 114


Step two adjustment for distortions in markets where diverted demand moves

Step Two: Adjustment for distortions in markets where diverted demand moves


Lecture notes econ 437 837 economic cost benefit analysis lecture six

d

m

W

P

d*

x

x

Step Two: Adjustment for distortions in markets where diverted demand moves

  • Amount of diverted demand per unit is

  • Because of increased demand by our project, they will shift their consumption to other goods and services. If these goods and services are taxed at an average rate of d*, the additional taxes will reduce the economic cost of good X.

  • These additional taxes are denoted as and offset initial cost.

  • The economic cost of the non-traded good X now becomes:

  • We should note that the larger is the value of d*, the lower will be the economic cost of a non-traded input used by a project, or the lower will be economic benefit generated by the non-traded output of a project.

e

s

s

d

d

P

=

W

P

+

W

P

x

x

x

x

x


Economic benefits of project output no distortions on output but input market distorted

Step Three: Adjustment for Distortions (Tariffs, Excise Taxes and Subsidies) in the Markets of the Inputs Used in the Production of a Non-Tradable Good

Economic Benefits of Project Output (No distortions on output but input market distorted)

Price

S0

A

S0 + Project

C

P0m

E

G

F

P1m

B

D

D0

s1

Q

Q0

QT

d1

Q

Quantity

Value of Resources Saved

Economic Value

= WxsPs+WxdPd

If distortions on markets of input then

Pd = Pm but Ps < Pm

Value of distortions on inputs (taxes) no resource value

Value of Increased Consumption


Lecture notes econ 437 837 economic cost benefit analysis lecture six

Step Three: Adjustment for Distortions (Tariffs, Excise Taxes and Subsidies) in the Markets of the Inputs Used in the Production of a Non-Tradable Good


Lecture notes econ 437 837 economic cost benefit analysis lecture six

Step Three: Adjustment for Distortions (Tariffs, Excise taxes and Subsidies) in the Markets of the Inputs Used in the Production of a Non-Tradable Good (Cont’d)

  • WsPs might overstate or understate opportunity costs if there are taxes or subsidies on the inputs.

  • Tradable Inputs

  • Suppose, in the production of good x, the market of one of its tradable inputs (i) is distorted by an excise tax.

  • These taxes are not economic costs.

  • Need to adjust by

  • =input-output coefficient showing the quantity of (distorted) input i

  • used in the production of one unit of x

  • =market price per unit of input i

  • di=effective rate of tariff, excise tax or sales tax on input i

  • This correction is equivalent to substituting the economic values of the inputs (excluding the adjustment for the FEP) for their financial values. The expression for this adjustment is written in a more general form in terms of distortions di, as , di has a positive value if it represents an excise tax, sales tax, import tariff or a negative value if the distortion is a subsidy.


Lecture notes econ 437 837 economic cost benefit analysis lecture six

Step Three: Adjustment for Distortions in the Markets of the Inputs Used in the Production of a Non-Tradable Good (Cont’d)

  • Non-Traded Inputs

  • The fundamental objective is to remove any distortions associated with the non-traded inputs j used to produce a non-traded good X.

  • Case I: Tax (dj) on non-traded inputs

  • In the case where there is just a tax on the purchase of input j, the financial cost of the input will be Pjm(1+dj) and the economic cost [WjsPjm + WjdPjm(1 + dj - d*)] where dj is the rate of tax on input j and d* is the average rate of indirect taxes on traded and non-traded goods. In this case, Ps = Pm.

  • We wish to subtract the financial costs of input j from the supply price of X and then add back j’s economic cost. The adjustment to the supply price of X for the distortions input j is expressed as:

  • Simplifying this expression, we have to do adjustment for this tax, dj, on j. Hence, the value of the distortion cause by the tax adjustment is:


Lecture notes econ 437 837 economic cost benefit analysis lecture six

Step Three: Adjustment for Distortions in the Markets of the Inputs Used in the Production of a Non-Tradable Good (Cont’d)

  • Case II: Subsidy (kj) and Tax (dj) on non-traded inputs

  • Suppose instead there is a tax on input of j and also a subsidy on production of j. Hence, Ps = Pm (1 + kj) and Pd = Pm (1 + dj). The adjustment will be:

  • Hence, the value of the distortion created by the tax and subsidy on non-traded input is:


Lecture notes econ 437 837 economic cost benefit analysis lecture six

Step Three: Adjustment for Distortions in the Markets of the Inputs Used in the Production of a Non-Tradable Good (Cont’d)

  • The distortion of tax and subsidy on non-traded input is:

when, dj, a tax on non-tradable input, and d* are both positive that will reduce the economic cost of the final non-traded good X but kj is a subsidy on non-tradable supply of input j which is negative and will, thus, increase the economic cost of the final non-traded good X.

  • The expression summing up the distortions in the markets for traded inputs i (=1 through n), and non-traded inputs j (= 1 to z) is as follows:


Lecture notes econ 437 837 economic cost benefit analysis lecture six

Step Four: Adjust for Foreign Exchange Premium on Tradable Components

  • There will be a need to adjust the proportion of the tradable components (T) of the non-tradable good by the foreign exchange premium (FEP). This is expressed as follows:

    • Value of foreign exchange premium (FEP), (FEP = Ee/Em - 1), on the tradable good components of the non-tradable input

      = [T  Pxm FEP)]

      where:

      T = proportion of tradable good component of the non-tradable input (x) used by the project expressed as a proportion of the financial market price Pxm

      Pxm = market price per unit of output x

      Ee = economic exchange rate

      Em = market exchange rate


Lecture notes econ 437 837 economic cost benefit analysis lecture six

Step Four: Adjust for Shadow Price of Non-Tradable Outlays (SPNTO)

  • There will be a need to adjust the proportion of the non-tradable components (NT) of the non-tradable good by the premium of non-tradable outlays (NTP). [NTP = SPNTO – 1].

  • This is expressed as follows:

  • Value of the NTP adjustment for the non-tradable component of the non-tradable input

  • = [NT  Pxm NTP]

  • where:

  • NT = proportion of non-tradable good component of the non-tradable input (x) used by the project expressed as a proportion of the financial market price Pxm

  • Pxm = market price per unit of output x

  • NTP = the premium on non-tradable outlays


General formula for the estimation of the economic prices of non tradable goods and services1

General Formula for the Estimation of the Economic Prices of Non-Tradable Goods and Services

This formula can be used to estimate the economic price of a non-tradable good,

that is either an input used by a project or an output produced by it.


Lecture notes econ 437 837 economic cost benefit analysis lecture six

Economic Value of Increase in Quantity Demanded of an Input in the

Case of the Infinite Supply Elasticity

- Example of Electricity Supply by Thermal Generation -

Price

Project demand (Q1 – Q0) of a non-tradable

Step 1

Ws = 1 and Wd = 0

If no direct subsidy then Ps = Pm

Step 2

With an infinite supply elasticity of electricity, Wd = 0. There is no diverted demand from other goods and services.

Ps=Pm

D0+P

D0

Q0

Q1

Quantity

ΣiaxioPimdi

Step 3

Need to adjust for input distortions. If supply of output is infinite elastic then supply of inputs must also be infinite elastic (tradable good inputs). Estimation of value of input distortion = ΣiaixoPimdiwhere aixo is the input-output coefficient of the input, i, used to produce a unit of x, while Pim is the price of a specific input i, and di is the tax wedge associated with the use of input i in the production of x.

Step 4

Need to adjust for foreign exchange premium (FEP) and premium on non-tradable outlays (NTP) on tradable and non-tradable goods and services, respectively. Total costs of production made up with tradable inputs proportion (Tx) and non-tradable inputs proportion (NTx). In the case of thermal electricity supply we would expect Tx to be close to 1 and NTx to be quite small, where Tx + NTx = 1. Estimation of adjustments for premiums = Pxm Tx FEP + Pxm NTx NTP

To summarize, the economic value of a unit of good x being demanded (or produced) by our project is equal to: Pxm - ΣiaixoPidi + Pxm Tx FEP + Pxm NTx NTP

or,Pxm [1 + (Tx FEP) + (NTx NTP)] - ΣiaixoPi di


Illustrative example estimating the economic cost of a non tradable input

Illustrative Example: Estimating the Economic Cost of a Non-tradable Input

  • Assume that the market for clay bricks is competitive, the market price is subject to a 14% excise tax and brick producers receive a 15% subsidy (k) on their production cost.

  • Without the project, the quantity demanded and supplied in the market is 7 million bricks per month at a market price (Pmz) of R0.2 per brick.

  • Now introduce a project that requires 300,000 bricks per month.

  • Two of the inputs used in the production of bricks have distortions in their markets: (1) Clay, a non-tradable good, has a 14% excise tax levied on its market price (Pmclay) of R7 per ton, (2) Furnace oil, an importable good, has a subsidy (koil) of 20% on its CIF price of US $240 per ton.

  • The input-output coefficient for furnace oil (Azoil) is 0.180 tons of oil per 1000 bricks and that of clay (Azclay) is 3.5 tons of clay per 1000 bricks.


Illustrative example estimating the economic cost of a non tradable input cont d

Illustrative Example: Estimating the Economic Cost of a Non-tradable Input (cont’d)

  • The tradable, T, (proportion of the market price) and non-tradable, NT, (proportion of the market price) good components of bricks are estimated at 0.60 and 0.40, respectively, of the market price of bricks.

  • The market exchange rate (Em) is R9.85 per US dollar, the economic exchange rate (Ee) is R10.44 per dollar, NTP is 1%, and the weighted average rate of indirect taxes on traded and non-tradable goods and services (d*) is 9%.


Lecture notes econ 437 837 economic cost benefit analysis lecture six

Prices, Relative Supply and Demand Weights, and Tradable and Non-Tradable Components for Brick Production

Price Estimation

Pmz = R0.2

Psz = Pmz / (1 - zk) = 0.2 / (0.85) = R0.2353

Pdz = Pmz (1 + excise tax) = 0.2 (1.14) = R0.2280

  • Assigning a weight of 0.67 to the supply side (Wsz) and a weight of 0.33 to the demand side (Wdz) and seems plausible.

  • Pe = 0.33 * 0.2280 + 0.67 * 0.2353


Lecture notes econ 437 837 economic cost benefit analysis lecture six

  • On the demand side, the tax on good tz, that other demanders will not be paying because they are now buying other goods is partially offset by the taxes they will now pay d*.

  • Hence, the opportunity cost of the forgone consumption of others is equal to,

Adjustment for distortions in markets for bricks and where the diverted demand moves :

Pzm [1 + (tz – d*)]

where tz is equal to excise tax, 14%.

d* is the weighted average rate of indirect taxes on traded and non-tradable goods and services, 9%.

The net adjustment is:

- Pzm d*

= - 0.2 x 0.09

= - 0.0180 R/brick


Lecture notes econ 437 837 economic cost benefit analysis lecture six

Estimating the value of the distortion per ton of furnace oil (Tradable component)

Pimdi= CIF Price Em(-k)

= 240  9.85  (-0.2)

= -R 472.80 per ton

aoilkPimdi (the value of the distortion per brick)

= aoilz* (-472.8/1,000)

= - 0.18 *0.4728

= - 0.085 R/brick


Estimating the value of the distortion per ton of clay

Estimating the value of the distortion per ton of Clay

Pmclay * aclayz [Wsclay(dclay – kclay) + Wdclay d*]

= 7 * 0.0035 [0.67 * (0.14 – 0) + 0.33*0.09]

= 0.0245 (0.0938 + 0.0297)

= 0.0245 (0.1235)

= 0.0030 R/brick


Estimating the economic price of brick

Estimating the Economic Price of Brick

Pze = Wzs Pzm/(1-kz) + Wzd Pzm [1 + (tz – d*)]

- Wzs{ΣiaizoPmi di + Σjajzo[WjsPmj(dj – kj) + WjdPmj d*]} + Pzm Tz FEP + Pzm NTz NTP

= 0.67 (0.2353) + 0.33 (0.2280 – 0.0180)

- 0.67 (-0.085 + 0.0030) + 0.2 (0.60)(0.06) +0.2 (0.40)(0.01)

= 0.2270 + 0.0549 + 0.0072 + 0.0008

= 0.2899 R/brick


Conversion factor for bricks

Conversion Factor for Bricks

  • To estimate the commodity specific conversion factor for bricks used by a project (CSCFdz), we divide the economic price by the financial demand price.

  • Recall that the demand price is inclusive of the excise tax.

    CSCFdz = Pez / Pdz

    = 0.2899/ 0.228

    = 1.2715


Lecture notes econ 437 837 economic cost benefit analysis lecture six

SPECIAL NOTE:

Adjustment for VAT in the Markets of the Inputs Used in the Production of a Non-Tradable Good

  • Final Good X Subject to VAT or Zero Rated

  • If final good X is subject to VAT or Zero Rated, then VAT paid on purchase of inputs can be taken as a credit against tax owed on sale of output or refunded if zero rated when final product is exported.

  • The line item in the financial analysis reporting the net VAT payments to the government (or refunds of input taxed received from the government on exports)will have a conversion factor of zero.

  • In calculation of conversion factors the financial price of the items include the VAT in the financial values.

  • Final Good X Exempt from VAT

  • If the final good X is exempt from the VAT, the value added tax paid on the inputs will have to be taken into account in deriving the economic value of output because no credit is possible against the tax on the sales of final good, because there is no tax liability.

  • The rate of VAT on the price of input i would have to be estimated tvi. The amount of adjustment to WxsPxs is - Wxs(ATxiPim tiv) for the economic analysis.

  • This is the identical treatment to the case of any excise tax, sales tax or import tariff on an input. When these taxes are not used as a credit to offset any indirect taxes owed on the sales of final good or service.


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