Last Updated:26 Oct.,2006

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• Last Updated26 Oct.,2006
• Lecture Notes
• ECON 622 ECONOMIC COST-BENEFIT ANALYSIS
• Lecture 6

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MEASUREMENT OF ECONOMIC PRICES OF NON-TRADABLE
GOODS
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Non-Tradable Commodities

• A good or service is considered non-tradable when
  its domestic price is determined by local demand
  and supply.
• An increase in demand (or supply) by a project
  could affect the amounts demanded by domestic
  consumers (or produced by other suppliers).

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Defining a Price of Non-Traded Good or Service

• Goods and services whose domestic production
  satisfies all the domestic demand for these items
  and whose domestic prices are not affected by
  their world prices are referred to as non-traded
  goods.

Domestic price
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• Steps to Estimate the Economic Value of a
  Non-Tradable Good or Service
• Adjust for distortions in the market for the item
  (whether input to, or output of, the project).
• Adjustment for Distortions in other markets.
  Because of General Equilibrium Effects.

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Non-Tradable Goods Economic Benefits of Project
Output (No Distortions)
Step One Adjusting for Distortions in the Market
for Good or Service
Price
S0
A
S0 Project
C
P0m
E
G
F
P1m
B
D
D0
s1
Q
d1
Q0
QT
Q
Quantity
Economic Value WxsPsWxdPd If no output
market distortions, then Ps Pd Pm
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Calculating the Economic Value of Non-Tradable
Goods
Economic Value Wxs P s Wxd P d
weighted average of supply (Ps) and demand
(Pd) price
Where
Ws Wd 1
Weights expressed in terms of elasticities
Supply Elasticity
?
Wxs

Supply Elasticity - Demand Elasticity
? - ?
Demand Elasticity -?
Wxd

Supply Elasticity - Demand Elasticity ? - ?
?
Wxs

-?
Wxd
P s Supply Price
? (defined positively)own price elasticity of
supply
P d Demand Price
? (defined negatively) own price elasticity of
demand
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Calculating the Economic Value of Non-Tradable
Goods

• Classification of Goods and Weights on Demand and
  Supply Prices
• If rationing then Ws0 and Wd1
• Traded Importable Ws 1 and Wd 0
• Exportable Ws 0 and Wd 1
• Non-traded Ws gt 0 and Wd gt 0
• Three classes of goods Ws Wd
• (S more responsive than D)
  2/3 1/3
• (Equally responsive) 1/2 1/2
• (S less responsive than D)
  1/3 2/3

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Non-Tradable Goods Economic Benefits of Project
Output (Tax on Output)
Price
S0
A
S0 Project
d0
m0
P
P
F
N
(1ts)

m1
d1
G
(1ts)
P
P

E
s0
m0
P
P

J
m1
s1
P

P
H
B
D0
D
D0 Net of Tax
Quantity
s1
d1
d/s0
Q
Q
Q
Economic Benefits
Wxs P
mx0
Wxd P
mx0
(1 t s )
Example Wx s 1/3, Wx d2/3 Pm120, t s
0.15 Pe1/3(120)2/3(120)(10.15)132
Pe4080(1.15)132
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Non-Tradable Goods Economic Benefits of Project
Output (other producers subsidized)
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Non-Tradable Goods Economic Costs of Project
Input (Input production subsidized)