VALUATION OF BENEFITS
AND COSTS 2
When Markets Don’t Clear:
Ceilings and Floors
ABC Rent Control:
The market for rentals
R
1000
D [A = 1000 - R]
Consumers’ surplus = $125k
Producers’ surplus = $125k
Sum = $250k
800
S = [A = R]
500
where
A = rental units
R = monthly rent
200
0
200
500
800
1000
A
ABC Rent Control:
The first order consequences
Producers’ surplus = $80k
Landlords lose $45k
R
1000
D [A = 1000 - R]
800
S = [A = R]
600
where
A = rental units
R = monthly rent
400
Producer
surplus
200
0
200
400
600
800
1000
A
ABC Rent Control:
no rationing inefficiency
Consumers’ surplus = $160k
Consumers gain =$35k
Producers’ surplus = $80k
Sum = $240k, NBRC = -$10K
R
1000
D [A = 1000 - R]
800
600
Consumer
surplus if
there were no
rationing
inefficiency
S = [A = R]
where
A = rental units
R = monthly rent
400
Producer
surplus
200
0
200
400
600
800
1000
A
ABC Rent Control:
rationing inefficiency
Consumers’ surplus = $120k
Renters lose $5k!
Producers’ surplus = $80k
Sum = $200k, NBRC = -$50K
R
1000
D [A = 1000 - R]
Losers
800
S = [A = R]
600 Consumer
surplus with
rationing
inefficiency
400
where
A = rental units
R = monthly rent
Producer
surplus
200
0
200
400
600
800
1000
A
ABC where there is a price
floor
The inverse demand for labor
is L=500-5W, where W is the
hourly wage rate and L is the
number of full-time workers
demanded. The supply is given
by L=50W. The market would
clear at a wage of $9.09 with
455 workers employed.
There is a minimum wage of
$10 per hour. Demand = 450,
Supply = 500, unemployment =
50.
$12
D = [L = 500-5W]
W = 100-.2L
$8
S = [L = 50W]
W = .02L
$6
$4
$2
0
200
400
600
ABC where there is a price
floor (cont)
$12
To staff the project we
built on Monday, we
need 25 employees.
What would be the
hourly budgetary
cost?
$250
D = [L = 500-5W]
W = 100-.2L
$10
$8
S = [L = 50W]
W = .02L
$6
$4
Budgetary
cost per hour
$2
0
200
400
600
ABC where there is a price
floor (cont)
$12
What would be the
hourly social cost?
D = [L = 500-5W]
W = 100-.2L
$10
$8
$125
S = [L = 50W]
W = .02L
$6
$4
Social
cost per hour
$2
0
200
400
600
Effect of paying people who
are unemployed
$12
L = 445
W = $10.90
$10
S = [L = 50(W-2)]
W = 2+.02L
$8
$6
$4
D = [L = 500-5W]
W = 100-.2L
$2
0
200
400
600
Real Effect of Minimum Wage
Increase from $6 to $8
Wage
S
8
C
A
The Gain to low-wageworkers is A-D
The loss to consumers
A+B
The Net Loss is B+D
B
6
Low-wage workers gain
11.5M*$4k-.5($12k) = $40B
4
Non-poor consumers lose
.5(11.5M+12M)*$4k = $47B
D
2
D
Net loss = $7B
8
11
10
Number of minimum wage workers
(000,000)
12
Valuation: Fishing
D
Constant Costs
P
S
P’
SХ
Q
Q’
Secondary market: Fishing
tackle
D
Constant Costs
P
S
DХ
Q
Q’
CONCEPTUALLY BCA IS
SIMPLE
1. Decide whose benefits and costs count (standing).
2. Select the portfolio of alternative projects.
3. Catalogue potential (physical) consequences and select
measurement indicators.
4. Predict quantitative consequences over the life of the project.
5. Monetize (attach dollar values to) all consequences .
6. Discount for time to find present values.
7. Sum: Add up the benefits and costs.
8. Perform sensitivity analysis.
9. Recommend the alternative with the largest net benefit
Street Widening
• Transportation costs (travel time
reductions/increased travel) avoided
• Increased local economic activity
• Construction cost
Street Widening
• Increased traffic will damage buildings,
requiring increased maintenance (reducing
property value)
• Traffic diversion during construction will
increase sales of gasoline
• Property values of service stations and other
car friendly businesses will increase along
the newly widened street
• Traffic on alternate routes would be reduced,
thereby reducing congestion and allowing
speedier trips
Street Widening (cont)
• Fewer people would ride the bus; bus
drivers would be fired
• Air pollution might increase
• City might need to hire more traffic
policemen
• Traffic fines might increase
• Trees lining street would have to be cut
down and sold to a local sawmill
Valuation Questions
• Is the demand schedule linear (or can
we reasonably assume it is)?
• Do we have to worry about income
effects?
ASSUMING THE ANSWERS ARE YES AND NO
• Does the market clear?
• Are costs constant?
• Are there market imperfections?
THE REALITIES OF DOING
BCA
•
•
•
Catalogue potential (physical) consequences and select
measurement indicators.
Difficult to identify specific consequences where
unresolved scientific or biological processes are involved.
True consequences may be unobservable.
Predict quantitative consequences over the life of the project.
Prediction is difficult, especially over long periods for complex
systems.
Monetize (attach dollar values to) all consequences (WIP).
Where there are no appropriate market values, one needs
“catalogues” that rarely exist. .