Indirect Welfare Effects of Price Changes and Cost-Benefit Analysis

Tinbergen Inst. Discussion Paper No. TI 02-011/3

27 Pages Posted: 26 Mar 2002

See all articles by Jan Rouwendal

Jan Rouwendal

VU University Amsterdam - Department of Spatial Economics; Tinbergen Institute

Date Written: November 2, 2001

Abstract

The effects of a policy measure often reach the consumer only after one or more intermediate steps, for instance because the measure lowers the cost of an input for an industry producing a consumer good. This paper is concerned with the question how to measure such indirect effects correctly under conditions of perfect and imperfect competition. Conventional CBA measures the indirect effects on consumers as the direct effect on other actors (e.g. the Marshallian consumer's surplus of the demand for the input whose price changes). Formal analysis establishes the correctness of this approach under perfect competition, provided that the demand curve is appropriately defined. Under less than perfect competition, the indirect effect can differ from the 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 of the model specification and on the possibility of entry.

Keywords: cost benefit analysis, project evaluation, indirect effects

JEL Classification: D61, H43, H54

Suggested Citation

Rouwendal, Jan, Indirect Welfare Effects of Price Changes and Cost-Benefit Analysis (November 2, 2001). Tinbergen Inst. Discussion Paper No. TI 02-011/3, Available at SSRN: https://ssrn.com/abstract=304020 or http://dx.doi.org/10.2139/ssrn.304020

Jan Rouwendal (Contact Author)

VU University Amsterdam - Department of Spatial Economics ( email )

De Boelelaan 1105
1081HV Amsterdam
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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