Consumer and Producer Surplus in Benefit-Cost Analysis

BENEFIT­COST ANALYSIS financial and economic appraisal using spreadsheets Consumer and Producer Surplus in Benefit-Cost Analysis (Campbell & Brown Chapter 7) Harry Campbell & Richard Brown School of Economics UQ, St. Lucia 2003 Figure 7.1: Consumer Surplus $ E P0 A P1 C B D O Q0 Q1 Trips per year The market prices of project inputs or outputs will NOT change if: - the inputs or outputs are TRADED ie. price is determined in world markets) - the project is SMALL relative to the size of the economy in which is undertaken Examples of project outputs or inputs whose prices might change: - output: a bridge - price of trips across a river - input: wage of skilled labour in a local market eg. ICP case study (Ch.7, p.26) Suppose the market price of project output is predicted to fall from P0 to P1 as a result of the increase in quantity supplied from Q0 to Q1 (as in Figure 7.1). How do we value the additional output (Q1 - Q0) in a social benefit-cost analysis? Project Analysis: use P1 Private Analysis: use P1 Efficiency Analysis: use (P0+P1)/2 Referent Group Analysis: calculate the aggregate net benefits in the usual way How do we account for the fall in price of the original quantity of output, Q0? Clearly consumers benefit by the amount (P0 - P1)Q0. When will that represent a net benefit of the project? When the fall in price from P0 to P1 represents a fall in cost, as in the bridge example, the value (P0 - P1)Q0 is a net benefit which is included in the efficiency net benefits. When the fall in price does not represent a fall in cost, one group is better off (consumers) and another group is worse off (firms) by the same amount. The amount (P0 - P1)Q0 is simply a transfer from consumers to firms and it nets out in the efficiency benefit-cost analysis. ... - tailieumienphi.vn