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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.

Suggested Citation

  • Jan Rouwendal, 2002. "Indirect Welfare Effects of Price Changes and Cost-Benefit Analysis," Tinbergen Institute Discussion Papers 02-011/3, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20020011
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    References listed on IDEAS

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    1. Gramlich, Edward M, 1994. "Infrastructure Investment: A Review Essay," Journal of Economic Literature, American Economic Association, vol. 32(3), pages 1176-1196, September.
    2. Nevo, Aviv, 2001. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Econometrica, Econometric Society, vol. 69(2), pages 307-342, March.
    3. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
    4. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March.
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    Cited by:

    1. Torben Holvad & John Preston, 2005. "Road Transport Investment Projects and Additional Economic Benefits," ERSA conference papers ersa05p522, European Regional Science Association.
    2. Paal Brevik Wangsness & Kenneth Løvold Rødseth & Wiljar Hansen, 2017. "A review of guidelines for including wider economic impacts in transport appraisal," Transport Reviews, Taylor & Francis Journals, vol. 37(1), pages 94-115, January.
    3. repec:mul:je8794:doi:10.1429/34355:y:2011:i:1:p:125 is not listed on IDEAS
    4. Koopmans, Carl & Oosterhaven, Jan, 2011. "SCGE modelling in cost-benefit analysis: The Dutch experience," Research in Transportation Economics, Elsevier, vol. 31(1), pages 29-36.
    5. Bert Hof & Arjan Heyma & Toon Hoorn, 2012. "Comparing the performance of models for wider economic benefits of transport infrastructure: results of a Dutch case study," Transportation, Springer, vol. 39(6), pages 1241-1258, November.
    6. Gwilliam, Ken, 2008. "A review of issues in transit economics," Research in Transportation Economics, Elsevier, vol. 23(1), pages 4-22, January.

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    More about this item

    Keywords

    cost benefit analysis; project evaluation; indirect effects;
    All these keywords.

    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

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