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Benefit-Cost Analysis BASICs. Monetary Measures of Utility. How much is a gallon of gas worth to a person? Expenditure at going price (“value in exchange”) Value above price/expenditure? Suppose you can buy as much gasoline as you wish at $1 per gallon once you enter the gasoline market.

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Presentation Transcript
monetary measures of utility
Monetary Measures of Utility
  • How much is a gallon of gas worth to a person?
    • Expenditure at going price (“value in exchange”)
    • Value above price/expenditure?
      • Suppose you can buy as much gasoline as you wish at $1 per gallon once you enter the gasoline market.
      • Q: What is the most you would pay to enter the market?
      • Q: How would you depict this graphically?
      • Q: How could you depict this value and the consumer expenditure on a demand graph?
consumer s surplus with competitive supply
Consumer’s Surplus(with competitive supply)

p1

CS = ½* qm(pmax- pm)

Expenditure= qm* pmarket

MC = Supply

“Value in Use” = E + CS = “Impact Study”

benefit cost analysis
Benefit-Cost Analysis

Policy Change: Excise tax imposed of $t

Deadweight Loss = ½ *(p1-pm)*(qm-q1)

CS

p1

TaxRevenue

t

pm

Marginal Cost

SellerRevenue

q1

qm

(output units)

benefit cost analysis1
Benefit-Cost Analysis

Expenditure of tax revenues in

Market 2

Added CS + Expenditure =

Pm2(q2-qm2) + ½ p2(q2-qm)

p2

t

pm2

MC

qm2

q2

(output units)

general equilibrium cba
General Equilibrium CBA
  • Preceding graphic provides measure of welfare loss in single market
    • Total effect takes into account gain in welfare from expenditure of funds in new market(s)
    • Net Welfare Change in $ =

½ *(p1-pm)*(qm-q1) – P2m(q2-qm2) ½ p2*(q2 – qm2)

compensating variation and equivalent variation
Compensating Variation and Equivalent Variation
  • Two additional dollar measures of the total utility change caused by a price change are
    • Compensating Variation: the least income that, at the new prices, just restores the consumer’s original utility level?
    • Equivalent Variation: the least income that, at the old prices, just restores consumer’s utility level
bca with pricing power producer s surplus
BCA with Pricing PowerProducer’s Surplus

Output price (p)

Producer Surplus = q1*pm - VC

Supply =

Marginal Cost

pm

Producer

Variable costs =

q

(output units)

q1

bca with pricing power
BCA with Pricing Power

DeadweightLoss

CS

pb

TaxRevenue

t

ps

PS

q1

q0

(output units)

benefit cost beyond the basics
Benefit-Cost Beyond the Basics
  • GE/Externality Issues (MN Recycling Case)
    • Are market prices/cost accurate reflection of values?
    • Markets involved; degree of development; subsidies; secondary costs
  • Non-market goods
    • WTP Methods
      • Hedonic regressions
      • Implicit Values
        • Time Valuation
        • Life Valuation
  • Future projects
    • Projections of use/demand for project (see impact studies)
      • Surveys; Simulations (Portland Traffic case; Seattle Rail)
    • Projection of impacts on related goods/services
      • Simulations; Existing studies
    • Projections of cost
      • Direct v. Secondary costs
    • Time Aspects
      • Discounting rates
      • Time Horizons
  • Special Topics—Basis of Big Errors
    • Impacts Over (under) Estimated (See Impact Study Discussion)
      • Poor Cost Estimates
      • Poor Use/Demand Estimates
    • Double counting: “jobs created”
    • Market Prices v. Consumer Surplus