5. Secondary Markets Reading: ÝBGVW, Chapter 5 ÝMOMA article

1. Primary vs. Secondary Markets ÝPrimary: direct effect ÝSecondary: indirect effect ÝExamples: public transit, dredging, fishing  Other names for “ secondary effects ” second round spillover pecuniary indirect side

2. Theme ÝAll Impacts are typically fully measured as surplus changes in primary markets ÝException distortions in secondary markets (externality, monopoly, taxes) May want to trace equity effects

3. Fishing Example ÝNo distortion/No price change in 2 nd markets Fishing equipment is the secondary market

Tempting to treat increase in panel (b) as an increase in consumer surplus, but this is wrong. It would be double counting. All surplus is captured in cs in primary recreation demand mkt. Think about what is in the demand curve for recreational fishing trips Simple numerical example: åTotal wtp for a fishing trip is $100 å travel cost to site is - $ 20 å bait cost is - $ 5 åCons Surplus for fishing trip: $ 75

In this example. What is the individual ’ s maximum wtp for bait? åTotal wtp for fishing: $100 å Cost of travel: - $ 20 å Max wtp for bait: - $ 80 å $ 0 Now consider the demand for (twtp) for bait and surplus in that market. åTotal wtp for bait: $ 80 å Cost of bait: $ 5 å $ 75 Consumer surplus for bait, but this is derived from the primary mkt for fishing days! Double counting! Demand (or wtp) for bait is a DERIVED from demand for fishing trip.

Comment: essential & nonessential What about expenditures on fishing equipment, the area ?

ÝNo distortion/Yes price change in 2 nd mkt Boardman et al., Cost-Benefit Analysis, Prentice Hall, Golf is the secondary market

Again, tempting to add surplus changes in golf mkt, but must be careful. Again, think about what is in recreational fishing demand curve (good golf substitute, no or bad golf substitute) But rec fishing demand curve assumes price of golf is fixed and it is changing Three demand curves: D* is the observed or equilibrium demand curve. It is adjusting or accounting for the price changes. If you use this curve you will fully capture the effects of golfing price shifts in mkt! Note: area(abc) ~ area(efg)

ÝDistortion in secondary market Fishing equipment is the secondary market, but lead sinkers cause external effect What if there was a tax on sinkers?

ÝGeneral Rule Ignore surplus changes in undistorted secondary markets, but account for effects in distorted (externality, monopoly, tax) secondary markets. ÝMultipliers Secondary markets, so ignore If standing is narrow enough or analyst really wants to trace impacts, OK. åBe consistent åGet both sides of transfers Yankee Stadium/Transfers ÝExamples on page 127