1 / 11

Last Updated: 26 Oct.,20 0 6 Lecture Notes ECON 622: ECONOMIC COST-BENEFIT ANALYSIS Lecture 6

Last Updated: 26 Oct.,20 0 6 Lecture Notes ECON 622: ECONOMIC COST-BENEFIT ANALYSIS Lecture 6. MEASUREMENT OF ECONOMIC PRICES OF NON-TRADABLE GOODS. Non-Tradable Commodities. A good or service is considered non-tradable when its domestic price is determined by local demand and supply.

verdi
Download Presentation

Last Updated: 26 Oct.,20 0 6 Lecture Notes ECON 622: ECONOMIC COST-BENEFIT ANALYSIS Lecture 6

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. Last Updated:26Oct.,2006 Lecture Notes ECON 622: ECONOMIC COST-BENEFIT ANALYSIS Lecture 6

  2. MEASUREMENT OF ECONOMIC PRICES OF NON-TRADABLE GOODS

  3. Non-Tradable Commodities • A good or service is considered non-tradable when its domestic price is determined by local demand and supply. • An increase in demand (or supply) by a project could affect the amounts demanded by domestic consumers (or produced by other suppliers).

  4. Price Domestic Supply S Distorted World Supply Price Em* PCIF* (1+Tm) + Fm Pm Distorted World Demand Price Em* PFOB* (1-tx) - Fx D Domestic Demand Quantity per year Defining a Price of Non-Traded Good or Service • Goods and services whose domestic production satisfies all the domestic demand for these items and whose domestic prices are not affected by their world prices are referred to as non-traded goods. Domestic price

  5. Steps to Estimate the Economic Value of a Non-Tradable Good or Service • Adjust for distortions in the market for the item (whether input to, or output of, the project). • Adjustment for Distortions in other markets. Because of General Equilibrium Effects.

  6. Value of Resources Saved Value of Increased Consumption Step One: Adjusting for Distortions in the Market for Good or Service Non-Tradable Goods Economic Benefits of Project Output (No Distortions) Price S0 A S0 + Project C P0m E G F P1m B D D0 s1 Q Q0 QT d1 Quantity Q Economic Value = WxsPs+WxdPd If no output market distortions, then: Ps = Pd = Pm

  7. Calculating the Economic Value of Non-Tradable Goods Economic Value = Wxs P s + Wxd P d =weighted average of supply (Ps) and demand (Pd) price Where: Ws + Wd = 1 Weights expressed in terms of elasticities: Supply Elasticity  Wxs = = Supply Elasticity - Demand Elasticity  -  Demand Elasticity - Wxd = = Supply Elasticity - Demand Elasticity  -   Wxs = - Wxd P s = Supply Price  = (defined positively)own price elasticity of supply P d = Demand Price  = (defined negatively) own price elasticity of demand

  8. Calculating the Economic Value of Non-Tradable Goods Classification of Goods and Weights on Demand and Supply Prices • If rationing then Ws=0 and Wd=1 • Traded: Importable Ws = 1 and Wd = 0 Exportable Ws = 0 and Wd = 1 • Non-traded Ws > 0 and Wd > 0 Three classes of goods:WsWd (S more responsive than D) 2/3 1/3 (Equally responsive) 1/2 1/2 (S less responsive than D) 1/3 2/3

  9. Value of Resources Saved Value of Increased Consumption Non-Tradable Goods Economic Benefits of Project Output (Tax on Output) Price S0 A d0 m0 S0 + Project P P = (1+ts) N F d1 m1 P = P (1+ts) G s0 m0 E P = P J s1 m1 P = P H B D0 D D0 Net of Tax Quantity s1 d/s0 d1 Q Q Q Economic Benefits Wxs P mx0 + Wxd P mx0 (1+ t s ) Example Wx s =1/3, Wx d=2/3 Pm=120, t s =0.15 Pe=1/3(120)+2/3(120)(1+0.15)=132 Pe=40+80(1.15)=132

  10. Price S0 S After subsidy 0 s0 m0 P = P / (1-k) H A S After Subsidy 0+Project s1 m1 P = P / (1-k) F d0 m0 E I P = P J d1 = m1 P P G B C D D0 Quantity Q s1 Q d/s0 Q d1 Economic Benefits P mx0 Wxs Value of Resources Saved Value of Increased Consumption + Wxd P mx0 (1-k) Example Wx s =1/3, Wx d=2/3 Pm=90, k=0.40 Pe=1/3*(90/(1-0.4))+2/3*(90) Pe=1/3(150)+2/3(90)=110 Non-Tradable Goods Economic Benefits of Project Output (other producers subsidized)

  11. Price S0 H s1 m1 P = P / (1-k) C After Subsidy 0 G S s0 m0 P = P / (1-k) B D I E d1 m1 P = P F J d0 = m0 P P Value of Additional Resources A D0+Project D0 Quantity Value of Postponed Consumption d1 d/s0 s 1 Q Q Q Economic Costs P mx0 Wxs + Wxd P mx0 (1-k) Example Wxs =1/3, Wxd=2/3 Pm=90, k=0.40 Pe=1/3(90/(1-0.4))+2/3(90) ; Pe=1/3(150)+2/3(90)=110 Non-Tradable Goods Economic Costs of Project Input (Input production subsidized)

More Related