Lecture2_3509 - What is a project Introduction to Project...

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Introduction to Project Evaluation (Chapter 1 of the Book) What is a project? Development/Investment project like a hospitals, schools, road, dam Regulation What type of projects are we interested? Government Private Sector Evaluation Before After 1
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2 Economic Analysis Helps design and select projects that contribute to the well-being of a country Can help: Determine who should undertake the project (public vs. private sector) Say go or no-go for a given project Assess costs of environmental impacts Assess contribution to poverty reduction Estimate fiscal impacts
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3 Project Analysis: Introduction If you were to evaluate a project for providing public funding, you should try to answer these questions: 1. Is there a rationale for public sector involvement? 2. What is the economic setting? 3. What are the objectives of the project? 4. What will happen if the project proceeds or not? 5. Is the project the best alternative? 6. Is the project worthwhile? 7. What are the economic impacts of the project? 8. Who are the winners and losers? 9. Does the project have separable components? 10. Is the project financially sustainable? 11. What is the Project’s Fiscal Impact? 12. What is the project’s environmental impacts? 13. Is this a risky project?
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4 1. Rationale for public sector involvement (Appendix 1 A) We know that: Competitive equilibrium: believed to maximize social surplus Competitive equilibrium: believed to be Pareto-Efficient, e.g. no one can be made better-off without making someone else worse-off. So, if this happens, what would be the reasons for public sector involvement?
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Public Sector Involvement In many cases, private markets fail to produce socially optimal quantities of goods and services. Government intervention could improve welfare. 5
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6 Public Sector Involvement Market failure: Competition is imperfect, monopolies Public Goods Externalities Incomplete Information Costs of capital Project Size Poverty reduction Merit Goods
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Monopolies A pure monopoly is where a single firm has the market to itself with no actual or potential competition from other firms In this case, she has market power or price-setting power. A monopoly sets the price in order to maximize profits 7
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Monopoly Profits = TR – TC Maximize profits MR = MC Consider demand, P(Q) = A – B*Q MR = d/dQ((A-B*Q)*Q) MR=A – 2B*Q = MC 8
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9 MC=AC q $/q Demand MR q C q M p M p C =MC
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Sources of monopoly A contrived monopoly is when firms take action to prevent competition or are granted a monopoly by government decree A union of several firms acting as a monopoly is called a cartel Government monopoly decrees include patents and franchises A n industry is said to be a natural monopoly if one firm can produce a desired output at a lower cost than two or more firms 10
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11 Natural Monopolies Industries where the production by a single firm minimizes the cost economies of scale: unit costs of
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