Evaluating Large Projects When There Are Substitutes: Looking for Possible Shortcuts
23 Pages Posted: 13 Oct 2018
Date Written: September 17, 2018
This paper discusses how to evaluate a large project when there is a substitute. The new large project causes discrete price adjustments in the substitute market. For example, a new high-speed rail may shift the demand curve for flight tickets to the left and reduce their price, in turn shifting the demand curve for train tickets to the left. There are several different ways to handle this complication, and we hopefully provide some guidance how to proceed. In particular, we point at an approach that captures the general equilibrium effects of a considered project in its output market. In theory at least, this approach provides a simple short-cut in cost-benefit analysis of (infrastructure and other) projects that are so large that they have a noticeable impact on equilibrium prices in other markets. A similar shortcut for transport projects that affect time costs is also supplied.
Keywords: Cost-Benefit Analysis, Large Projects, Substitutes, Time Costs
JEL Classification: D61, H43, R40
Suggested Citation: Suggested Citation