1 / 14

Civil Systems Planning Benefit/Cost Analysis

Civil Systems Planning Benefit/Cost Analysis. Scott Matthews 12-706/19-702 / 73-359 Lecture 9. Revisiting HW 2, Question 2 (Dam). Thanks to Ryan and Jenny.. Their argument “should stop doing the project when the yearly PV goes negative”; year 45 instead of 66

oleg-talley
Download Presentation

Civil Systems Planning Benefit/Cost Analysis

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Civil Systems PlanningBenefit/Cost Analysis Scott Matthews 12-706/19-702 / 73-359 Lecture 9

  2. Revisiting HW 2, Question 2 (Dam) • Thanks to Ryan and Jenny.. • Their argument “should stop doing the project when the yearly PV goes negative”; year 45 instead of 66 • This is a “social cash flow” problem • Should use continuous discounting, but that’s not concern here • Part a (no concerns) show to keep adding rows until NPV (cumulative) goes to 0 • Use cumulative NPV to automate/avoid doing 25 separate NPV worksheets • But in reality, what the cumulative says is what NPV “up to year n” would have been had we done a separate worksheet • Our rule is “select project as long as NPV > 0” 12-706 and 73-359

  3. HW 2, Q2 (cont) • Part b just has different discount rates.. (no big deal) • Still - same basic framework applies. Finding NPVs to use our “rule”, but using cumulative NPV to help see when it would have gone to zero (if had done 45-66 separate worksheets) 12-706 and 73-359

  4. Revisiting old problem.. I changed At cash streams to be non-uniform, and decreasing Would we do this project with information above? Eg 5 years? Does the fact that PV “goes negative” in year 4 matter? 12-706 and 73-359

  5. Last thoughts • Had we done separate worksheets to test NPV for each year 25 to 66, we would have found a positive NPV. • That is our decision rule for accepting projects. 12-706 and 73-359

  6. Monopoly - the real game • One producer of good w/o substitute • Not example of perfect comp! • Deviation that results in DWL • There tend to be barriers to entry • Monopolist is a price setter not taker • Monopolist is only firm in market • Thus it can set prices based on output 12-706 and 73-359

  7. Monopoly - the real game (2) • Could have shown that in perf. comp. Profit maximized where p=MR=MC (why?) • Same is true for a monopolist -> she can make the most money where additional revenue = added cost • But unlike perf comp, p not equal to MR 12-706 and 73-359

  8. Monopoly Analysis In perfect competition, Equilibrium was at (Pc,Qc) - where S=D. But a monopolist has a Function of MR that Does not equal Demand So where does he supply? MC Pc Qc MR D 12-706 and 73-359

  9. Monopoly Analysis (cont.) Monopolist supplies where MR=MC for quantity to max. profits (at Qm) But at Qm, consumers are willing to pay Pm! What is social surplus, Is it maximized? MC Pm Pc Qm Qc D MR 12-706 and 73-359

  10. Monopoly Analysis (cont.) What is social surplus? Orange = CS Yellow = PS (bigger!) Grey = DWL (from not Producing at Pc,Qc) thus Soc. Surplus is not maximized Breaking monopoly Would transfer DWL to Social Surplus MC Pm Pc Qm Qc D MR 12-706 and 73-359

  11. Natural Monopoly • Fixed costs very large relative to variable costs • Ex: public utilities (gas, power, water) • Average costs high at low output • AC usually higher than MC • One firm can provide good or service cheaper than 2+ firms • In this case, government allows monopoly but usually regulates it 12-706 and 73-359

  12. Natural Monopoly Faced with these curves Normal monop would Produce at Qm and Charge Pm. We would have same Social surplus. But natural monopolies Are regulated. What are options? a Pm d P* AC b e MC c Qm Q* D MR 12-706 and 73-359

  13. Natural Monopoly Forcing the price P* Means that the social surplus is increased. DWL decreases from abc to dec Society gains adeb a Pm d P* AC b e MC c D Qm Q* Q0 MR 12-706 and 73-359

  14. Monopoly • Other options - set P = MC • But then the firm loses money • Subsidies needed to keep in business • Give away good for free (e.g. road) • Free rider problems • Also new deadweight loss from cost exceeding WTP 12-706 and 73-359

More Related