2. Monetary Measures of Utility  How much is a gallon of gas worth to a person?  Expenditure at going price (“value in exchange”)  Value above price/expenditure?  Suppose you can buy as much gasoline as you wish at $1 per gallon once you enter the gasoline market.  Q: What is the most you would pay to enter the market?  Q: How would you depict this graphically?  Q: How could you depict this value and the consumer expenditure on a demand graph?

3. Consumer’s Surplus (with competitive supply) p1p1 CS = ½* q m ( p max - p m ) Expenditure= q m * p market “Value in Use” = E + CS = “Impact Study” MC = Supply

4. Tax Revenue Benefit-Cost Analysis (output units) qmqm q1q1 Policy Change: Excise tax imposed of $t pmpm p1p1 t CS Deadweight Loss = ½ *(p1-pm)*(qm-q1) Seller Revenue Marginal Cost

5. Benefit-Cost Analysis (output units) q m2 Expenditure of tax revenues in Market 2 p m2 p2p2 t Added CS + Expenditure = P m2 (q 2 -q m2 ) + ½ p 2 (q 2 -q m ) MC q2q2

6. General Equilibrium CBA  Preceding graphic provides measure of welfare loss in single market  Total effect takes into account gain in welfare from expenditure of funds in new market(s)  Net Welfare Change in $ = ½ *(p1-pm)*(qm-q1) – P2m(q2-qm2) ½ p2*(q2 – qm2)

7. Compensating Variation and Equivalent Variation  Two additional dollar measures of the total utility change caused by a price change are  Compensating Variation: the least income that, at the new prices, just restores the consumer’s original utility level?  Equivalent Variation: the least income that, at the old prices, just restores consumer’s utility level

8. BCA with Pricing Power Producer’s Surplus q (output units) Output price (p) Supply = Marginal Cost Producer Variable costs = Producer Surplus = q 1 *p m - VC q1q1 pmpm

9. Tax Revenue BCA with Pricing Power (output units) q0q0 PS q1q1 psps pbpb t CS Deadweight Loss

10. Benefit-Cost Beyond the Basics  GE/Externality Issues (MN Recycling Case)  Are market prices/cost accurate reflection of values?  Markets involved; degree of development; subsidies; secondary costs  Non-market goods  WTP Methods  Hedonic regressions  Implicit Values  Time Valuation  Life Valuation  Future projects  Projections of use/demand for project (see impact studies)  Surveys; Simulations (Portland Traffic case; Seattle Rail)  Projection of impacts on related goods/services  Simulations; Existing studies  Projections of cost  Direct v. Secondary costs  Time Aspects  Discounting rates  Time Horizons  Special Topics—Basis of Big Errors  Impacts Over (under) Estimated (See Impact Study Discussion)  Poor Cost Estimates  Poor Use/Demand Estimates  Double counting: “jobs created”  Market Prices v. Consumer Surplus