1. 1 Civil Systems Planning Benefit/Cost Analysis Chapters 4 and 5 Scott Matthews Courses: 12-706 and 73-359 Lecture 6 - 9/17/2003

2. 12-706 and 73-3592 What is WTP by society to avoid? Q P Q# P# S*: marginal Private costs D S#:marginal Social costs P* Q* Differences in cost functions represent the alternative ‘valuations’ of the product - Thus difference between them WTP to avoid costs

3. 12-706 and 73-3593 Notes about Public Spending  Resource allocation to one project always comes at a ‘cost’ to other projects  E.g. Pittsburgh stadium projects  “Use it or Lose it”  There is never enough money to go around  Thus opportunity costs exist  Ideally represented by areas under supply curves  Do not consider ‘sunk costs’  Three cases (we will do 2, see book for all 3)

4. 12-706 and 73-3594 Price Floors (e.g. Min. Wage)  Labor market example (tricky)  Supply and demand ‘reversed’ - ideas of ‘consumer’, ‘producer’ switched  In labor market, workers are ‘producers’  Companies are ‘consumers’ of labor  A ‘price floor’ is a guaranteed wage rate level that must be kept  Good for some workers, bad for others

5. 12-706 and 73-3595 Price Floor (e.g. Min Wage) L=num of workers P Ld Pm S D Pe Le Pr D+L’ LsLt

6. 12-706 and 73-3596 Problem 4-2 from Book  Done on Board

7. 12-706 and 73-3597 Monopoly Project - What is NSB? MR1D MC Q1 P1 P2 Q3Q2 Q’ D+Q’ MR2

8. 12-706 and 73-3598 Monopoly Project - Agency Cost MR1D MC Q1 P1 P2 Q3Q2 Q’ D+Q’ MR2 C E A A AA A A G G G Agency Cost is A+C+G+E

9. 12-706 and 73-3599 Monopoly Project - PS (2 parts) MR1D MC Q1 P1 P2 Q3Q2 Q’ D+Q’ MR2 C E A A AA A A G G G PS is price effect + Quantity effect = B+C+G+E C+G+E is transfer B

10. 12-706 and 73-35910 Monopoly  Easy to see loss in CS is B+C. Thus:  Original Buyers lose B+C  Monopolist gains B+C+G+E  Project Costs A+C+G+E  --  NSB = (loss) A+C  Budgetary outlays larger than Social costs

11. 12-706 and 73-35911 Secondary (aka spillover) Markets  When secondary markets affected  Can and should ignore impacts as long as primary effects measured and undistorted secondary market prices unchanged  Measuring both usually leads to double counting (since primary markets tend to show all effects)

12. 12-706 and 73-35912 Primary: Fishing Days Q1 P0 D Price Government puts more fish in lake for fishermen Makes local lake more attractive, lowers travel/access costs Number of fishing days increases in quantity Change in CS is trapezoid P0-a-b-P1 b a Q0 MC0 MC1 P1

13. 12-706 and 73-35913 Secondary Market: Equipment P0 D0 D1 q0q1