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Indirect Welfare Effects of Price Changes and Cost-Benefit Analysis

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  • Jan Rouwendal

    ()
    (Department of Spatial Economics, Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam, Tinbergen Institute, and Department of Social Sciences, Wageningen University)

Abstract

The effects of a policy measure often reach the consumer only after one or more intermediatesteps, for instance because the measure lowers the cost of an input for an industry producinga consumer good. This paper is concerned with the question how to measure such indirect effectscorrectly under conditions of perfect and imperfect competition. Conventional CBA measures the indirecteffects on consumers as the direct effect on other actors (e.g. the Marshallian consumer'ssurplus of the demand for the input whose price changes). Formal analysis establishes thecorrectness of this approach under perfect competition, provided that the demand curve isappropriately defined. Under less than perfect competition, the indirect effect can differ fromthe direct effect. Under monopoly the indirect effect is always larger than the direct effect.Under monopolistic competition it can be smaller, identical or larger, depending on the details ofthe model specification and on the possibility of entry.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 02-011/3.

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Date of creation: 06 Feb 2002
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Handle: RePEc:dgr:uvatin:20020011

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Web page: http://www.tinbergen.nl

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Keywords: cost benefit analysis; project evaluation; indirect effects;

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  1. Nevo, Aviv, 1998. "Measuring Market Power in the Ready-To-Eat Cereal Industry," Food Marketing Policy Center Research Reports, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy 037, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
  2. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, Econometric Society, vol. 63(4), pages 841-90, July.
  3. David Aschauer, 1988. "Is public expenditure productive?," Staff Memoranda, Federal Reserve Bank of Chicago 88-7, Federal Reserve Bank of Chicago.
  4. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, American Economic Association, vol. 67(3), pages 297-308, June.
  5. Gramlich, Edward M, 1994. "Infrastructure Investment: A Review Essay," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 32(3), pages 1176-96, September.
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Cited by:
  1. Koopmans, Carl & Oosterhaven, Jan, 2011. "SCGE modelling in cost-benefit analysis: The Dutch experience," Research in Transportation Economics, Elsevier, Elsevier, vol. 31(1), pages 29-36.
  2. Gwilliam, Ken, 2008. "A review of issues in transit economics," Research in Transportation Economics, Elsevier, Elsevier, vol. 23(1), pages 4-22, January.
  3. Torben Holvad & John Preston, 2005. "Road Transport Investment Projects and Additional Economic Benefits," ERSA conference papers ersa05p522, European Regional Science Association.

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