Aggregation Need to aggregate impacts across individuals

Slides:



Advertisements
Similar presentations
Competition and the Market
Advertisements

Aggregation Need to aggregate impacts across individuals Welfare Function: Aggregation of individual welfare functions.
Valuation 2 and 3: Demand and welfare theory
B/C – A and distributional issues (Cost Benefit Analysis DEC 51304) Zerbe & Dively Ch.11 R. Jongeneel.
Chapter 2 CONCEPTUAL FOUNDATIONS OF COST-BENEFIT ANALYSIS
Welfare measurement: individual CS, CV, EV and PS
External Costs and Benefits
Welfare measurement: aggregate (Cost Benefit Analysis DEC 51304) Z&D 6 R. Jongeneel.
1 Civil Systems Planning Benefit/Cost Analysis Scott Matthews / and Lecture 2 - 9/1/2004.
Evaluating the environment Gauri-Shankar Guha. Dr. Gauri-Shankar Guha ASU - Econ Evaluating the Environment For the individual, economic values.
1 Civil Systems Planning Benefit/Cost Analysis Scott Matthews Courses: and Lecture 2 - 8/28/2002.
AGEC 608 Lecture 02, p. 1 AGEC 608: Lecture 2 Objective: Review conceptual foundations of CBA Readings: –Boardman, Chapter 2 –Kankakee, Sections I and.
Equilibrium and Efficiency
1 External Costs. 2 Overview An externality is a situation where a third party is affected by an economic activity. The externality can be either positive.
ECMB36 LECTURE NOTES MEASURING CHANGES IN SOCIAL WELFARE Townley, Chapter 5.
Aggregate Supply & Demand
Business Economics The Behavior of Firms. Assumption: Profit Maximization Problem: You have 6 acres of land and you are deciding how many acres to spray.
Economic Evaluations, Briefly… CHSC 433 Module 6/Chapter 13 UIC School of Public Health L. Michele Issel, PhD, R N.
Overview Aggregating preferences The Social Welfare function The Pareto Criterion The Compensation Principle.
Welfare economics Outline Expressing changes in human well-being (utility) in monetary terms Deciding between monetary measures that are equally theoretically.
ECON 6012 Cost Benefit Analysis Memorial University of Newfoundland
Chapter 10 CBA and valuation1 CHAPTER 10 Cost-Benefit Analysis and Valuation.
PARETO OPTIMALITY AND THE EFFICIENCY GOAL
© 2009 Pearson Education Canada 4/1 Chapter 4 More Demand Theory.
Measuring Welfare Changes of Individuals Exact Utility Indicators –Equivalent Variation (EV) –Compensating Variation (CV) Relationship between Exact Utility.
Chapter 4: Economic Efficiency, Government Price Setting, and Taxes 1 of 33 © 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony.
Jack L. Knetsch 6 September “A core set of economic assumptions should be used in calculating benefits and costs”. (Arrow, et al., 1996) “Any measurement.
Social welfare economics foundations for CBA G. Mason 2010.
ECON 6012 Cost Benefit Analysis Memorial University of Newfoundland
PPA 723: Managerial Economics Lecture 21: Benefit/Cost Analysis 2, Valuing Benefits and Costs The Maxwell School, Syracuse University Professor John Yinger.
Chapter 14 Equilibrium and Efficiency. What Makes a Market Competitive? Buyers and sellers have absolutely no effect on price Three characteristics: Absence.
Contingent Valuation Methods See Boardman et al., Chapter 14 Interview individuals to elicit their preferences for different states of the world. Based.
Thinking Like An Economist. Introduction Example: Accommodation May prefer peace and quiet, but houses are expensive, e.g. house rent for $1,000/mo. Choices:
Social Welfare Functions and CBA
PPA 723: Managerial Economics Lecture 18: Externalities The Maxwell School, Syracuse University Professor John Yinger.
Chapter 14 Equilibrium and Efficiency McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All Rights Reserved.
The Economics of Taxation. Warm Up 1. Do you think the government utlizes our tax dollars effectively? Why or Why not? 2. Explain the difference gross.
Environmental Demand Theory M Rafiq. Discussion Demand curve is an information on importance of a good for individual Out of limited income, allocation.
Poverty measures: Properties and Robustness Michael Lokshin DECRG-PO The World Bank.
Lecture 8 Social Regulation. Correction of market failures, not dealing with the natural monopoly problem Regulation of health, safety, environment, public.
Economics of Trade International Political Economy Prof. Tyson Roberts 1.
Fiscal Policy and the multiplier
PERFECT COMPETITION McGraw-Hill/Irwin
Chapter 6 Elasticity, Consumer Surplus, and Producer Surplus
Ex Ante Efficiency and Ex Post Equality
Compensating Wage Differentials
On privatization methods in Eastern Europe and their implications
THE LOGIC OF INDIVIDUAL CHOICE: THE FOUNDATION OF DEMAND AND SUPPLY
Measuring Welfare Changes of Individuals
Macroeconomic Equilibrium (AD/AS)
Theoretical Tools of Public Finance
Chapter Fourteen Consumer’s Surplus.
Heterogeneity One limitation of the static LS model lies in the heterogeneity assumption. In reality, individuals differ in preference and in information.
14 Consumer’s Surplus.
CONCEPTUAL FOUNDATIONS OF CBA LECTURE 3
THE FIRM AND ITS CUSTOMERS: PART 2
Chapter 14 Consumer’s Surplus.
Part A-III (continued) Microeconomic Theory Review (continued)
WELFARE FOUNDATION OF CBA
Economics of agro-food safety and international market for agro-food products and legislation Antonio Stasi.
Return to Home Page GEOG 370 May 5,
Social Welfare Functions and CBA
Chapter Fourteen Consumer’s Surplus.
Chapter Thirty-Three Law and Economics.
REGULATORY IMPACT ANALYSIS: COMPARING BENEFITS AND COSTS
Cost Benefit analysis in a Climate Change Context
Chapter Fourteen Consumer’s Surplus.
The Analysis of Competitive Markets
Chapter 34 Welfare Key Concept: Arrow’s impossibility theorem, social welfare functions Limited support of how market preserves fairness.
Session 2: Overview of Market Microstructure
Presentation transcript:

Aggregation Need to aggregate impacts across individuals Welfare Function: Aggregation of individual welfare functions.

Individual welfare function for i Ui = Ui(Xi1, Xi2, … Xij) Max L=Ui(Xi1, Xi2, … Xij) – λ(p1*Xi1+p2*Xi2 … - Y) FOC: ∂Uij/∂Xj = λ * Pj ∂Uij/∂Xj = ∂Ui/∂Y * Pj dUi = Σj ∂Ui/∂Xj dXij = Σj ∂Ui/∂Y*Pj dXij

Social Welfare Function W = W(U1,U2,U3,…Un) dW = Σi ∂W/∂Ui dUi = ΣjΣi ∂W/∂Ui * ∂Ui/∂Y * Pj dXij = MSUi * MU Incomei * Pj dXij

Kaldor – Hicks Compensation Tests Kaldor: The winners from a project can in principal compensate the losers Hicks: The losers cannot bribe the potential winners not to undertake the project Scitovsky: Both the Kaldor and Hicks criteria are met.

Kaldor – Hicks Compensation Tests These compensation tests assume: MSUi = MSU j for all i, j MUi Income = MUj Income = k. A dollar has the same “value” (utility) for all individuals in society, no matter what their income level (or other characteristics).

Gorman Demand form Ui = Ai(P) + B(P) * Yi ∂Ui/∂Y = B (for all i)

Example from Zerbe & Dively Consider option to build an airport Impacts: Costs If built, neighboring residents will suffer from increased noise WTP to not have the airport built (EV) WTA after airport is built (CV) Benefits Airlines “gain” from airport (increased profits)

Example 1 Residents Airlines Net Social Value No airport to airport -5000 WTA +3000 WTP -2000 Airport to no airport +3500 WTP -3000 WTA +500 Kaldor Hicks

WTP vs WTA Generally Expect WTP to avoid a negative change will be less than the WTA to accept the change. Why? WTP is constrained by limited income WTA is unconstrained For normal goods, price reduction will have positive income effect, price increase will have negative income effect

Question? Why would airlines (firms) have different WTP than WTA? WTP should be equal to expected future profits WTA should also be equal to expected future profits General point – always need to look at final impacts on consumers

Alternative Formulation Rather than the “benefits” of the airlines, consider the benefits of building the airport to local residents who would be able to use the new airport: Reduced (total) price of airline travel (including the price of travel to the nearest airport)

Example 1 Residents Airlines Net Social Value No airport to airport -5000 WTA +3000 WTP -2000 Airport to no airport +3500 WTP -3000 WTA +500

Resident airline travelers Example 1A Residents Resident airline travelers Net Social Value No airport to airport -5000 WTA +2000 WTP -3000 Airport to no airport +3500 WTP -3200 WTA +300

Ambiguous Outcomes of Compensation Rules

Resident airline travelers Example 2 Residents Resident airline travelers Net Social Value No airport to airport -5000 WTA +2000 WTP -3000 Airport to no airport +3500 WTP -4000 WTA -500

Ambiguous Outcomes of Compensation Rules In this situation: If airport does not exist, don’t build it If airport exists, do not get rid of it “Tyranny of the Status Quo” Also, depends on property rights. Do residents have right to quiet. If so they do not have pay the passengers, but passengers must compensate the residents for noise created.