When Markets Don

1
VALUATION OF BENEFITS AND COSTS 2

• When Markets Dont Clear
• Ceilings and Floors

2
ABC Rent Control The market for rentals
Consumers surplus 125k Producers surplus
125k Sum 250k
3
ABC Rent Control The first order consequences
Producers surplus 80k Landlords lose 45k
4
ABC Rent Control no rationing inefficiency
Consumers surplus 160k Consumers gain
35k Producers surplus 80k Sum 240k, NBRC
-10K
5
ABC Rent Control rationing inefficiency
Consumers surplus 120k Renters lose
5k! Producers surplus 80k Sum 200k, NBRC
-50K
6
ABC where there is a price floor
The inverse demand for labor is L500-5W, where W
is the hourly wage rate and L is the number of
full-time workers demanded. The supply is given
by L50W. 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.
7
ABC where there is a price floor (cont)
To staff the project we built on Monday, we need
25 employees. What would be the hourly budgetary
cost?
250
8
ABC where there is a price floor (cont)
What would be the hourly social cost?
125
9
Effect of paying people who are unemployed
L 445 W 10.90
10
Real Effect of Minimum WageIncrease from 6 to 8

• The Gain to low-wage-workers is A-D
• The loss to consumers AB
• The Net Loss is BD
• Low-wage workers gain
• 11.5M4k-.5(12k) 40B
• Non-poor consumers lose
• .5(11.5M12M)4k 47B
• Net loss 7B

11
Valuation Fishing
12
Secondary market Fishing tackle
13
CONCEPTUALLY BCA IS SIMPLE

• 1. Decide whose benefits and costs count
  (standing).
• 2. Select the portfolio of alternative projects.
• 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

14
Street Widening

• Transportation costs (travel time
  reductions/increased travel) avoided
• Increased local economic activity
• Construction cost

15
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

16
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

17
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?

18
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. .