Highlights of the textChapters 1 -3 Econ 4140 Greg Mason
The Benefit/Cost Problem The cost and benefits are rarely smooth – usually a time dimension exists and we compare “discounted costs to discounted benefits?
This is the evaluation problem This is the capital budgeting problem In media res is uncommon except in academic settings
By far the most important steps are 1, 2 and 3 • The remaining steps are largely mechanical
Why does imposing tolls reduce net benefits • Boardman et al argue “The major reason for the finding of lower net benefits is that tolls reduce demand for the highway, which reduces the value of most of the benefits (time saved, the value of safety benefits, and the value of decongestion on alternative highways)” Note, they also say “It is perhaps important to point out that congestion was not anticipated for many years. Of course, if congestion were a problem, tolls could raise aggregate social welfare” Costs and Benefits through Bureaucratic Lenses: Example of a Highway Project Author(s): Anthony Boardman, Aidan Vining, W. G. Waters, II Source: Journal of Policy Analysis and Management, Vol. 12, No. 3 (Summer, 1993), pp. 532- 555
Guardians are keepers of the public purse – They tend to view government as their own business. • They are not interested in valuing non-financial benefits.
Spenders are program advocates and may see some costs – wages paid from taxes – as a benefit and source of local economic development.
Three possible decision rules • No financial constraint (9+20+14=43) • Only 1 (B = 20) • Costs < $10 (A + C&D, 9+14=23, B-C=13)
Transitive – if XpY and YpZ, then XpZ • Arrow showed that even if individuals have transitive preferences, a group may not.
Market price If these presents consumers 1 to 8, ordered by7 willingness to pay, consumers 6, 7 and 8 would not participate
Price decrease – consumer surplus ↑ Price increase – consumer surplus ↓ Deadweight loss If the price rise is a tax, P2ACP* is the transfer from consumer to government
The supply curve is the MC above the AVC (why?) • The opportunity cost is shown by the total variable cost – it is the resource cost given up. • The area between the price and supply curve represents consumer surplus. Producer Surplus
Consumer + producer surplus = social surplus • Perfect competition maximizes social surplus • The point X* is allocatively efficient • Any deviation, such as rationing, reduces the social surplus
If government sets a price of PT, producers will supply XT, but consumers are willing only to purchase XT* at PT. • To absorb XT, the price to the consumer must fall to PD • PD-PT is filled by taxpayers. • The price would need to by PD for consumers to absorb XT. • P*bePDis a transfer from taxpayers to buyers. • P*bdPT is a transfer from taxpayers to sellers. • Such transfers are seen as offsetting. Deadweight loss XT*