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Unformatted text preview: Valuing Project Outputs Traded in Markets In the previous lecture, we saw how to determine the social opportunity cost of a project input when that input is traded in existing markets Now we examine how to determine the social value of a project output when that output is traded in existing markets Perfectly Elastic Demand or Small Project The market price of a good produced by a government project re ects the good's social value if the following conditions are satis ed the market in which the good is traded is undistorted; and the project doesn't a ect the price of the good A project will have a negligible e ect on the the price in the output market if either demand is perfectly or very elastic; or the amount produced by the project is small relative to the amount currently traded in the market First let's consider the case where the amount of the output created by the project ( q ) is reasonable large compared the amount of the output currently traded in the existing market ( q ) the output is traded in a perfectly competitive market the market demand for the output is perfectly or very elastic Econ 370 Lecture 7: page 1 $/unit Quantity D S S + q’ q' P q q 1 What is the social value of the project output if the government produces q units and sells it on the open market? In this case the project has no e ect on the market price, so the market price P re ects social value of one unit of the output the social value of the project output (ie, q units of the good) is q P government revenues from selling the output on the open market would accurately re ect...
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