Transcript Lecture Notes ECON 622: ECONOMIC COST-BENEFIT ANALYSIS Lecture 6

Last Updated:26 Oct.,2006
Lecture Notes
ECON 622: ECONOMIC COST-BENEFIT
ANALYSIS
Lecture 6
1
MEASUREMENT OF
ECONOMIC PRICES OF
NON-TRADABLE GOODS
2
Non-Tradable Commodities
• A good or service is considered nontradable 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).
3
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.
Price
Domestic Supply
S
Em * PCIF * (1+Tm) + Fm
Distorted World
Supply Price
Domestic price Pm
Em * PFOB* (1-tx) - Fx
Distorted World
Demand Price
D
Domestic Demand
Quantity
per year
4
Steps to Estimate the Economic Value of a NonTradable Good or Service
1) Adjust for distortions in the market for the
item (whether input to, or output of, the
project).
2) Adjustment for Distortions in other markets.
Because of General Equilibrium Effects.
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Step One: Adjusting for Distortions in the Market for Good or Service
Non-Tradable Goods
Economic Benefits of Project Output (No Distortions)
Price
S0
A
S0 + Project
C
P0m
P1m
G
F
E
B
D
D0
Q s Q0
1
Value of
Resources
Saved
d
Q1
QT
Quantity
Value of
Increased
Consumption
Economic Value
= WxsPs+WxdPd
If no output market distortions,
then:
Ps = Pd = Pm
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Calculating the Economic Value of Non-Tradable Goods
Economic Value = Wxs P s
+
Wxd P d
= weighted average of supply (Ps) and demand (Pd) price
Where: Ws + Wd = 1
Weights expressed in terms of elasticities:
Supply Elasticity
Wxs =
=
Supply Elasticity - Demand Elasticity
Demand Elasticity
Wxd =
Ps =
Supply Price
P d = Demand Price
- 
-
=
Supply Elasticity - Demand Elasticity

Wxs
=
-
Wxd

- 
 = (defined positively)own price elasticity of supply
 = (defined negatively) own price elasticity of demand
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Calculating the Economic Value of Non-Tradable
Goods
Classification of Goods and Weights on Demand and
Supply Prices
• If rationing then Ws=0
• Traded: Importable
Exportable
• Non-traded
Three classes of goods:
(S more responsive than D)
(Equally responsive)
(S less responsive than D)
and Wd=1
Ws = 1 and Wd = 0
Ws = 0 and Wd = 1
Ws > 0 and Wd > 0
Ws
Wd
2/3
1/2
1/3
1/3
1/2
2/3
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Non-Tradable Goods
Economic Benefits of Project Output (Tax on Output)
Price
S0
A
d
m
0
m
1
P 0 =P
d
(1+ts) N
G
P 1 = P (1+ts)
s
m
P0 =P 0
s
S0 + Project
F
E
J
m
P 1 =P 1
H
B
D0
D
D0
s
Q1
d
Q d/s Q 1
0
Net of Tax
Quantity
Economic Benefits
Wxs P mx0 + Wxd Pmx0 (1+ t s )
Example
Value of
Resources
Saved
Value of Increased
Consumption
Wx s =1/3, Wx d=2/3 Pm=120, t s =0.15
Pe=1/3(120)+2/3(120)(1+0.15)=132
Pe=40+80(1.15)=132
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Non-Tradable Goods
Economic Benefits of Project Output (other producers
subsidized)
Price
S0
After subsidy
s
m
P 0 = P 0 / (1-k)
s
S0
H
After Subsidy
A
m
S 0+Project
F
P 1 = P 1 / (1-k)
E
d
m
P 0 = P 0
I
J
d
m
P 1 =P 1
G
B
C
D
D0
Q s Q d/s
1
0
Quantity
Qd
1
Economic Benefits
m
P
x0
Wx
+ Wxd Pmx0
(1-k)
s
Value of
Resources
Saved
Value of
Increased
Consumption
Example
Wx s =1/3, Wx d=2/3 Pm=90, k =0.40
Pe=1/3*(90/(1-0.4))+2/3*(90)
Pe=1/3(150)+2/3(90)=110
10
Non-Tradable Goods
Economic Costs of Project Input (Input production
subsidized)
Price
S0
H
s
m
P 1 = P 1 / (1-k)
C
After Subsidy
G
P
s
0
= P
m
0
/ (1-k)
S
B
D
P
Value of
Additional
Resources
Value of
Postponed
Consumption
P
d
1=
d=
0
P
m
1
P
m
0
0
I
E
F
J
A
D0+Project
D0
d
Q1
d/s
Q0
Example
Q
Quantity
s
1
Economic Costs
m
P
Wxs x0 + Wxd P
(1-k)
m
x0
Wxs =1/3, Wxd=2/3 Pm=90, k =0.40
Pe=1/3(90/(1-0.4))+2/3(90) ; Pe=1/3(150)+2/3(90)=110
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