Evaluating Large Projects When There Are Substitutes: Looking for Possible Shortcuts

23 Pages Posted: 13 Oct 2018  

Per-Olov Johansson

Stockholm School of Economics

Gines de Rus

University of Las Palmas de Gran Canaria

Date Written: September 17, 2018

Abstract

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-benefi t 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

Johansson, Per-Olov and de Rus, Gines, Evaluating Large Projects When There Are Substitutes: Looking for Possible Shortcuts (September 17, 2018). CERE Working Paper, 2018:7. Available at SSRN: https://ssrn.com/abstract=3253023 or http://dx.doi.org/10.2139/ssrn.3253023

Per-Olov Johansson

Stockholm School of Economics ( email )

P.O. Box 6501
Stockholm
SWEDEN
+46 8 736 92 82 (Phone)
+46 8 30 21 15 (Fax)

Gines De Rus (Contact Author)

University of Las Palmas de Gran Canaria ( email )

Campus de Tafira
35017 Las Palmas, Las Palmas 35017
Spain
34 928451808 (Phone)
34 928458183 (Fax)

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