boardman_im_ch05 - CHAPTER 5: VALUING BENEFITS AND COSTS IN...

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CHAPTER 5: VALUING BENEFITS AND COSTS IN SECONDARY MARKETS Purpose: Estimating consumer surplus, producer surplus, and government revenue (i.e., social surplus) in secondary markets (i.e., markets that are indirectly affected by a policy or project). VALUING COSTS AND BENEFITS IN EFFICIENT SECONDARY MARKETS. A primary reason for secondary market effects is that price changes of goods in primary markets change the demand for the complements and substitutes of the primary market goods. These complements and substitutes are exchanged in secondary markets. Complements are goods that tend to be purchased and used with another good (e.g., hamburger buns are complements to hamburgers). Substitutes are goods that can be used in place of another good (e.g., hot dogs are substitutes for hamburgers). The effect in the primary market may or may not affect the price in secondary markets. Efficient market effects without price changes. The impacts in undistorted secondary markets should be ignored if the prices in the secondary markets don't change and the change in social surplus in the primary market is measured. The reason is that (absent price adjustments in secondary markets) impacts are typically fully measured as a social surplus change in the primary market. For example: A nearby lake is stocked with fish. This causes the effective price of fishing days to decrease. This, in turn, causes the number of fishing days to increase. The decline in the price of fishing days shifts the demand curve for fishing equipment (a complement) to the right. Because the local market is only a small portion of regional demand, it does not affect the price of fishing equipment. Moreover, any increase in consumer surplus resulting from the increased value that people place on fishing equipment is already reflected in the demand curve in the primary market (i.e., reflected in their WTP for fishing days) and, therefore, a part of the change in social surplus in the primary market. Secondary markets can only be ignored, however, if the social surplus in the primary market is actually measured. Efficient market effects with price change.
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This note was uploaded on 01/26/2011 for the course ECON 1111 taught by Professor Fertar during the Spring '10 term at Memorial University.

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boardman_im_ch05 - CHAPTER 5: VALUING BENEFITS AND COSTS IN...

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