Indirect Welfare Effects of Price Changes and Cost-Benefit Analysis
AbstractThe 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 InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 02-011/3.
Date of creation: 06 Feb 2002
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cost benefit analysis; project evaluation; indirect effects;
Find related papers by JEL classification:
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
- H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
- H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-03-04 (All new papers)
- NEP-MIC-2002-04-08 (Microeconomics)
- NEP-PBE-2002-03-04 (Public Economics)
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