Valuing Benefits & Costs in Primary Market
1. Valuing benefits in efficient markets: Implications on social surplus, changes in CS and PS,
government revenue when a project directly increases supply available to consumers:

No price changes: In an efficient market, increased supply without price changes leads to
higher consumer surplus and social surplus. Producer surplus remains unchanged, and
government revenue may indirectly increase through taxes on increased sales or economic
activity.

Price changes: If increased supply causes a decrease in price, consumer surplus increases
while producer surplus may decrease. Social surplus overall increases, and government
revenue can be affected depending on the impact on sales and economic activity.
2. Valuing benefits in distorted markets - Monopoly:

In a monopoly, the optimum production rule differs from perfect competition. The monopoly
maximizes profit by producing where MC equals MR and setting prices based on the demand
curve.

Compared to perfect competition, a monopoly restricts output, charges higher prices, and
potentially reduces social surplus. Consumer surplus decreases, and there may be
deadweight loss due to market inefficiencies.
Valuing benefits in distorted markets:
1. Natural monopoly:

Natural monopoly occurs when a single firm can serve the entire market more efficiently
than multiple firms.

Governments manage natural monopolies through price regulation, profit regulation, and
access regulation.

Implications of government management include balancing efficiency and affordability of
essential services.
2. Information asymmetry:

Information asymmetry arises when one party possesses more information than the other in
a transaction.

Adverse selection occurs when one party has more information about quality or risks,
leading to market inefficiency.

Moral hazard occurs when one party has more information about their actions, potentially
negatively impacting the other party.

Addressing information asymmetry involves disclosure requirements, regulation, and
promoting market competition.
3. Externalities:

Externalities are spillover effects of economic activities on third parties not involved in the
transaction.

Negative externalities impose costs on others, while positive externalities provide benefits.

Government interventions for externalities include taxes or subsidies, regulation, and
tradable permits.

Managing externalities aligns private and social costs or benefits for resource allocation
efficiency.