Highlights Chapter 5
ECON 4140
Valuation in secondary markets
Primary markets are directly affected by the
program/policy (hiring of labour, materials..)
Secondary markets are indirectly affected by the
policy/program.
Stocking the nearby lake with fish lowers
marginal cost and number of days fishing
increases with an increase in social surplus.
• Demand for fishing equipment rises.
Under competition, price will not rise, and
it seems that the consumer surplus has
risen.
• To do so is double counting.
• We do not include this, as long as price
does not rise.
We can ignore secondary markets when we measure all primary impacts and prices in
secondary markets do not change as a result of the program/policy.
Primary market
(Fishing)
• The increase in demand for fishing days raises
surplus by PF0abPF1 (initially)
• If fishing and golf are substitutes, the demand for
golfing will fall and fees for golfing fall.
• Producer surplus for golf courses falls and consumer
surplus (golfers) increases.
• The reduction in producer surplus exceeds the gain
in consumer surplus.
• Probably not
• The reasons is that the reduction in green fees will
increase the demand for golf, and reduce the
demand for fishing.
• D*DF1 shows the onserved demand and represents
a lower consumer surplus associated with the
increase in fish stocks.
The argument is tricky since the two figures show a
series of interactions over time.
Secondary market
(Golf)
Therefore, D* is the curve more likely to be used in a
CBA. This curve, however, understates the true
measure of the gain in social surplus in the primary
market. But this understatement is a close
approximation of the net loss of social surplus in
secondary markets due to price changes.
The unintended consequences of trade policy
Japanese cars are substitutes for U.S. cars →
limiting the imports would raise prices of Japanese
cars and therefore increase demand for US cars.
This increase in demand for US cars increased the
price of US carsm which raised the demand for
Japanese cars to increase, raising prices even more
The policy increased producer surplus for U.S. car
manufacturers, producer surplus for Japanese car
manufacturers, created a deadweight loss, and led
to a large decrease in consumer surplus.
The net effect was a loss in social surplus within the
U.S.
Effect of taxes on substitutes
Beef
Chicken
Beef and chicken are substitutes
• In equilibrium, assume PB and PC are the relevant
prices and demand DB0 and DC0
• Assume taxes on chicken of tc → price rises to P+tc
yielding revenue of T for the government and T+U
in loss of consumer surplus for chicken eaters.
• If beef is taxed by tB , price of beef rises and the
demand for chicken rises, reducing consumer
surplus by A+B.
• The shift in chicken demand is not an increase in
consumer surplus.
Valuation in distorted secondary markets
When market failure creates a divergence of private and
social cost, valuation impacts in secondary markets is tricky.
The increase in the demand for equipment creates a total cost
of x time the change in demand. The cost of the externality
should be subtracted from the net benefits of the project.
INDIRECT EFFECTS OF INFRASTRUCTURE PROJECTS
If the secondary market is undistorted, they can be ignored.
If a road improvement reduces tricking costs (lower time, less fuel) and this is
passed on to the consumer in the form of lower prices, this secondary benefit
can be ignored, since it is fully captured by the lower costs of the trucking
company, if the secondary market for food is undistorted.
To include these secondary benefits is double counting.
“Secondary markets effect produce community benefits only when these
markets are distorted – unemployment and barriers to resource movement .