Highlights Chapter 5 ECON 4140

Valuation in secondary markets Primary markets are directly affected by the program/policy (hiring of labour, materials..) Secondary markets are indirectly affected by the policy/program. Stocking the nearby lake with fish lowers marginal cost and number of days fishing increases with an increase in social surplus. We can ignore secondary markets when we measure all primary impacts and prices in secondary markets do not change as a result of the program/policy. Demand for fishing equipment rises. Under competition, price will not rise, and it seems that the consumer surplus has risen. To do so is double counting. We do not include this, as long as price does not rise.

Primary market (Fishing) Secondary market (Golf) The increase in demand for fishing days raises surplus by P F0 abP F1 (initially) If fishing and golf are substitutes, the demand for golfing will fall and fees for golfing fall. Producer surplus for golf courses falls and consumer surplus (golfers) increases. The reduction in producer surplus exceeds the gain in consumer surplus. Probably not The reasons is that the reduction in green fees will increase the demand for golf, and reduce the demand for fishing. D*D F1 shows the onserved demand and represents a lower consumer surplus associated with the increase in fish stocks. The argument is tricky since the two figures show a series of interactions over time. Therefore, D* is the curve more likely to be used in a CBA. This curve, however, understates the true measure of the gain in social surplus in the primary market. But this understatement is a close approximation of the net loss of social surplus in secondary markets due to price changes.

Japanese cars are substitutes for U.S. cars → limiting the imports would raise prices of Japanese cars and therefore increase demand for US cars. This increase in demand for US cars increased the price of US carsm which raised the demand for Japanese cars to increase, raising prices even more The policy increased producer surplus for U.S. car manufacturers, producer surplus for Japanese car manufacturers, created a deadweight loss, and led to a large decrease in consumer surplus. The net effect was a loss in social surplus within the U.S. The unintended consequences of trade policy

BeefChicken Effect of taxes on substitutes Beef and chicken are substitutes In equilibrium, assume P B and P C are the relevant prices and demand D B0 and D C0 Assume taxes on chicken of t c → price rises to P+t c yielding revenue of T for the government and T+U in loss of consumer surplus for chicken eaters. If beef is taxed by t B, price of beef rises and the demand for chicken rises, reducing consumer surplus by A+B. The shift in chicken demand is not an increase in consumer surplus.

Valuation in distorted secondary markets When market failure creates a divergence of private and social cost, valuation impacts in secondary markets is tricky. The increase in the demand for equipment creates a total cost of x time the change in demand. The cost of the externality should be subtracted from the net benefits of the project.

INDIRECT EFFECTS OF INFRASTRUCTURE PROJECTS If the secondary market is undistorted, they can be ignored. If a road improvement reduces tricking costs (lower time, less fuel) and this is passed on to the consumer in the form of lower prices, this secondary benefit can be ignored, since it is fully captured by the lower costs of the trucking company, if the secondary market for food is undistorted. To include these secondary benefits is double counting. “Secondary markets effect produce community benefits only when these markets are distorted – unemployment and barriers to resource movement.