1. VALUATION OF BENEFITS AND COSTS 1 WHEN MARKETS CLEAR

2. First Questions First Is there a market failure that could justify government action? Does it matter? -What would happen without government intervention? -What should government do? -Different answers? Which is better? Is there a market failure that could justify government action? Does it matter? -What would happen without government intervention? -What should government do? -Different answers? Which is better?

3. Next Come 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?

4. Valuation: No Distortions

7. Valuation: Distortions

9. Cost of Resources: No Distortions

15. Cost of Resources: Distortions

17. Project Cost Example The marginal cost of supplying concrete is MC=0.01Q, Where Q=1 million cubic yards of concrete. Because the supplier has a local monopoly, concrete is actually sold according to the supply curve P=0.02Q. The inverse (private) demand for concrete is P=6-0.04Q, Which implies the following demand, Q=150-25P. Solving for Q, P, CS & PS, we have: 6-0.04Q = 0.02Q 6 =.06Q, 100 = Q P =.02(100) = $2.00 CS = 100M(6-2)/2 = $200M, PS = 100M[(2+1)/2] = $150M

19. Adding the project The project will require 50M cubic yards of concrete, adding 50Q to Q=150-25P, gives us Q=200-25P or an inverse demand function of P=8 -.04Q. Once again, solving for Q, P, private consumption, CS, and PS, we get: 8 =.06Q, 133.33M = Q, P = $2.67 Private demand = 133.33M - 50M = 83.33M (of course 2.67 = 6 -.04Q = 83.33 = Q) CS =.5[83.33(6-2.67)] = $138.89M, -$61.11M PS= 133.33[(2.67+1.33)/2] $266.67M, +$116.67M Budget cost = $2.67*50M = -$133.33M

20. Consumer surplus loss = $61.11M

21. Producer surplus gain = $116.67M

22. Budgetary cost of project =-$133.33M

23. Net cost of project = -61.11 - 133.33+116.67 = -77.77 or [(100 83.33)(2+2.67)/2]+[(133.33- 100)*(1.33+1)/2] =38.88+38.89 = -77.77