When Markets Dont Clear: Ceilings and Floors When Markets Dont Clear: Ceilings and Floors VALUATION OF BENEFITS AND COSTS 2

ABC Rent Control: The market for rentals Consumers surplus = $125k Producers surplus = $125k Sum = $250k

ABC Rent Control: The first order consequences Producers surplus = $80k Landlords lose $45k

ABC Rent Control: no rationing inefficiency Consumers surplus = $160k Consumers gain =$35k Producers surplus = $80k Sum = $240k, NBRC = -$10K

ABC Rent Control: rationing inefficiency Consumers surplus = $120k Renters lose $5k! Producers surplus = $80k Sum = $200k, NBRC = -$50K

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.

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

ABC where there is a price floor (cont) What would be the hourly social cost? $125

Effect of paying people who are unemployed L = 445 W = $10.90

Real Effect of Minimum Wage Increase from $6 to $8 The Gain to low-wage- workers is A-D The loss to consumers A+B The Net Loss is B+D Low-wage workers gain 11.5M*$4k-.5($12k) = $40B Non-poor consumers lose.5(11.5M+12M)*$4k = $47B Net loss = $7B The Gain to low-wage- workers is A-D The loss to consumers A+B The Net Loss is B+D Low-wage workers gain 11.5M*$4k-.5($12k) = $40B Non-poor consumers lose.5(11.5M+12M)*$4k = $47B Net loss = $7B

Valuation: Fishing

Secondary market: Fishing tackle

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 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 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 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? 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..