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When Markets Don’t Clear: Ceilings and Floors

VALUATION OF BENEFITS AND COSTS 2. When Markets Don’t Clear: Ceilings and Floors. ABC Rent Control: The market for rentals. Consumers’ surplus = $125k Producers’ surplus = $125k Sum = $250k. ABC Rent Control: The first order consequences . Producers’ surplus = $80k Landlords lose $45k.

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When Markets Don’t Clear: Ceilings and Floors

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  1. VALUATION OF BENEFITS AND COSTS 2 When Markets Don’t Clear: Ceilings and Floors

  2. ABC Rent Control: The market for rentals Consumers’ surplus = $125k Producers’ surplus = $125k Sum = $250k

  3. ABC Rent Control: The first order consequences Producers’ surplus = $80k Landlords lose $45k

  4. ABC Rent Control: no rationing inefficiency Consumers’ surplus = $160k Consumers gain =$35k Producers’ surplus = $80k Sum = $240k, NBRC = -$10K

  5. ABC Rent Control: rationing inefficiency Consumers’ surplus = $120k Renters lose $5k! Producers’ surplus = $80k Sum = $200k, NBRC = -$50K

  6. ABC where there is a price floor The inverse demand for labor is L=500-5W, where W is the hourly wage rate and L is the number of full-time workers demanded. The supply is given by L=50W. The market would clear at a wage of $9.09 with 455 workers employed. There is a minimum wage of $10 per hour. Demand = 450, Supply = 500, unemployment = 50.

  7. ABC where there is a price floor (cont) To staff the project we built on Monday, we need 25 employees. What would be the hourly budgetary cost? $250

  8. ABC where there is a price floor (cont) What would be the hourly social cost? $125

  9. Effect of paying people who are unemployed L = 445 W = $10.90

  10. Real Effect of Minimum WageIncrease from $6 to $8 The Gain to low-wage-workers is A-D The loss to consumers A+B The Net Loss is B+D Low-wage workers gain 11.5M*$4k-.5($12k) = $40B Non-poor consumers lose .5(11.5M+12M)*$4k = $47B Net loss = $7B

  11. Valuation: Fishing

  12. Secondary market: Fishing tackle

  13. CONCEPTUALLY BCA IS SIMPLE 1. Decide whose benefits and costs count (standing). 2. Select the portfolio of alternative projects. Catalogue potential (physical) consequences and select measurement indicators. 4. Predict quantitative consequences over the life of the project. 5. Monetize (attach dollar values to) all consequences . 6. Discount for time to find present values. 7. Sum: Add up the benefits and costs. 8. Perform sensitivity analysis. 9. Recommend the alternative with the largest net benefit

  14. Street Widening • Transportation costs (travel time reductions/increased travel) avoided • Increased local economic activity • Construction cost

  15. Street Widening • Increased traffic will damage buildings, requiring increased maintenance (reducing property value) • Traffic diversion during construction will increase sales of gasoline • Property values of service stations and other car friendly businesses will increase along the newly widened street • Traffic on alternate routes would be reduced, thereby reducing congestion and allowing speedier trips

  16. Street Widening (cont) • Fewer people would ride the bus; bus drivers would be fired • Air pollution might increase • City might need to hire more traffic policemen • Traffic fines might increase • Trees lining street would have to be cut down and sold to a local sawmill

  17. 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?

  18. THE REALITIES OF DOING BCA • Catalogue potential (physical) consequences and select measurement indicators. • Difficult to identify specific consequences where unresolved scientific or biological processes are involved. • True consequences may be unobservable. • Predict quantitative consequences over the life of the project. • Prediction is difficult, especially over long periods for complex systems. • Monetize (attach dollar values to) all consequences (WIP). • Where there are no appropriate market values, one needs “catalogues” that rarely exist. .

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