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1、1,Fin650: Project Appraisal Lecture 9Comparison of Financial and Economic Appraisal,Analyzing Economic Costs and Benefits in an Existing Market,Consumer surplus,Producer surplus,Analyzing Economic Costs and Benefits in an Existing Market,The gross economic benefits from the consumption of the output
2、 from this industry are greater than the financial revenues received by the suppliers due to the consumer surplus enjoyed by the consumers of the output. Economic cost of producing the output is less than the financial revenues received by the suppliers due to the producer surplus enjoyed by the sup
3、pliers. The implication of these two facts is that the financial price of a unit may be different from its economic price even in the absence of distortions.,4,Analyzing the Economic Benefits of an Output Produced by a Project,Economic Benefits of a New Project in an Undistorted Market: Upward slopi
4、ng supply (a large project),5,Analyzing the Economic Benefit of an Output (subject to tax) Supplied by a Large Project,6,Analyzing the Economic Cost of an Input Demanded by a Project (Contd),If the quantity demanded by the project is relatively small compared to the size of the market then there wil
5、l only be a very small change in the market price. In such a situation and given that we are operating in an undistorted market, the gross financial cost to the project will be equal to the gross economic cost. A difference only arises when the change in the quantity demanded by the project is suffi
6、ciently large to have a large impact on the prevailing market price.,7,Analyzing the Economic Cost of an Input Demanded by a Project (Contd),If the quantity demanded by the project is large compared to the size of the market then there will only be a change in the market price. Government purchasing
7、 land Purchase price, P2*(q-q1) Economic costs Land taken through eminent domainEconomic costs,8,Analyzing the Economic Cost of an Input Demanded by a Project,Economic Cost of an Input Demanded by a Project in an Undistorted Market: Inelastic supply,9,Analyzing the Economic Cost of an Input Demanded
8、 by a Project,Economic Cost of an Input Demanded by a Project in an Undistorted Market:Upward sloping supply curve and a large Project,10,Analyzing the Economic Cost of an Input (subject to tax) Demanded by a Project,Large project subject to purely revenue generating input tax General principles: Wh
9、en a project reduces the quantity of input available for other people, use the willingness to pay (as indicated by the demand curve) as value When a project increases the quantity of input that the market must produce, use marginal cost for the value of the added input Tax is treated as transfer,11,
10、Analyzing the Economic Cost of an Input (subject to tax) Demanded by a Project,12,Class Exercise,A project uses large quantity of cements to build a bridge. Cements are subject to a Tk. 1/bag tax and 100 million bags will be used to build the bridge. As a result of the bridge, the price of cement in
11、cluding the tax, will rise to from Tk. 2 to Tk. 2.30 per bag and private consumers are expected to decrease their consumption by 20 million bags. What costs should be attached to this input?,13,Analyzing the Economic Cost of an Input (subject to taxes related to externalities) Demanded by a Project,
12、14,Economic Evaluation of Non-Tradable Goods and Services in Distorted Markets,Distortions are defined as market imperfections. The most common types of these distortions are in the form of government taxes and subsidies. Others include quantitative restrictions, price controls, and monopolies. We n
13、eed to take the type and level of distortions as given and not changed by the project when estimating the economic costs and benefits of projects. The task of the project analyst or economist is to select the projects that increase the net wealth of country, given the current and expected regime of
14、distortions in the country.,15,Valuation of Benefits in Distorted Markets,If market or government failures distort the relevant product market, then project benefits are measured by the changes in social surplus resulting from the project plus net revenues generated by the project Monopoly As in the
15、 competitive case, the social surplus generated by the output produced and sold in the monopolist is represented graphically by the area between the demand schedule and the marginal cost curve that is to the left of the MR and MC curves Social surplus above the price is received by the consumers and
16、 that below the price is captured by the producer Monopolist is a part of the society; therefore benefits accruing to them count. Breaking the monopoly will increase social surplus Deadweight loss would disappear Consumers will capture a part of the monopolists producers surplus, viewed as transfer,
17、16,Valuation of Benefits in Distorted Markets,17,Valuation of benefits in Distorted Markets,Natural Monopoly Four policies Allow monopoly, deadweight loss abc, monopoly profits=Pmafg Regulate monopoly, set PR = AC, eliminates monopoly profits, transferring social surplus to persons using the road, e
18、xpands output, reduces deadweight loss from area abc to area dec, societys benefit adeb Require road authority to set Pc , eliminates deadweight loss, price is less than AC, revenue no longer cover costs, subsidy would be required Free access, marginal costs exceed willingness to pay, deadweight loss chQo, no toll revenue, entire construction and operation costs have to be subsidized,
