Transcript Lecture 5
Last Updated:20 March,2007
Lecture Notes
ECON 622: ECONOMIC COSTBENEFIT ANALYSIS
Lecture 5
Economic Analysis of
Rationed Markets
NO RATIONING
ECONOMIC VALUE OF SERVICE FOR A COMPETITIVE PROJECT
Economic Benefits of Project Output (No Distortions)
With project, the output
price falls
$
D
S
E
m
Shaded area = economic
value of project output
P0
P m1
IJEH = Saving in resources due
to production cut back of
existing firms
HEFG = The incremental
consumer welfare (willingness to
pay) due to increase in
consumption
S’
F
J
A
Demand
0
I
H
Economic Price (Pe) = W s P s + W d P d
Pm = P s =P d
(No Distortions)
G
Quantity
Ws > 0 Wd > 0
Ws + Wd = 1
IMPACTS OF RATIONING
• If rationing then Ws = 0 and Wd = 1
• Need to measure the willingness to pay
Rationing can be Carried Out
by Restricting Access
For example:
• No existing telephone connections
• Shortages of water connection
Economic Value of Local Calls for Rural Customers
Tariff /Coping
Cost (US$/minute)
(MWTP)
P0 = 0.280
A
C
P1 = 0.120
Demand
Q0
Q1
Data Traffic (minutes/ year)
Economic value = Q0ACQ1 = Willingness to Pay
Rascom Satellite Project with the economic discount rate, 11%,
PV of Financial Payments (Q0P1CQ1) = US$ 656.09 (millions)
PV of Consumer Surplus (P1AC) = US$1368.98 (millions)
PV of Economics (Q0ACQ1) = US$ 2,025.07 (millions)
PV of Investments = US$ 521.64 (millions)
ECONOMIC VALUE OF WATER IF RATIONING SUPPLY TO
EXISTING CUSTOMERS
(For example, each customer is given 6 hours supply of water a day. Consumers
will store water and use it for the highest value of consumption.)
D
$
S0
E
PR
P m0
S1
I
F
A
0
P
Demand
Q0
Qd
Q0
= Initial Output
(Qd-Q0) = Project Output
P0m = Output Price charged
Q0EFQd = Willingness to Pay
for (Qd-Q0)
PR
= Rationed price or
current coping costs
Quantity
If supply is rationed, the selling price is fixed below the market equilibrium
price, hence, available supply is rationed.
Ws = 0 and Wd =1
Shaded area = economic value of project output (Q0-Q’)
Economic Value = Willingness to Pay
How do we find PR?
PR – P0m = Marginal Storage Costs/m3
K(r d) Annual Ma int enance Costsm 3
m 3
Pumping Costs / m 3
Limited Access
Market demand shifts if new customers
added
Market demand before
new customers added
Price
Demand of new
customers
Price
Market demand after
new customers added
Price
Market demand after
Market demand before
new customers added
Q0
Quantity
Q1
Quantity
Q0
Q0+Q1 Quantity
IF RATIONING IS CARRIED OUT BY RESTRICTING OF THE NUMBER OF
NEW CONNECTIONS – No Alternative Supply Available
- In this case focus Valuation based on Willingness To Pay only Example: Economic value of electricity or water
New customers added only as supply of service expanded
$
PMAX =D0
D1
S’
S0
B
P m0
C
F
D1
D0
0
Q0
Q
1
Quantity
• When new supply becomes
available, rationing of new
connections can be relaxed
• Shift from D1D0 to D1D1
• Shaded area = Economic
value of additional service
• (Q0-Q1) = Project Supply
provided to meet new
demand
Assuming 0D1 is close to 0D0, the average economic value of new service per
unit is:
Economic Value of Additional Service = ((PMAX + P0m)/2) * (Q0-Q1)
Economic Value of Additional Water Supply
(Senegal Rural Water Supply)
Cost of
Water
(FCFA/m3)
(Time savings)
Coping Costs
Reduction
(C1C0KL)
+(OTRQ0)
S0
Additional
Consumer
Surplus
(LKM)
S1
K
C0 = 450
L
C1 = 250
T = 200
O
M
N
R
Q0
(10)
Q1
(35)
Quantity
(liters/person/day)
Qp
Economic value = (450-50)*10/35+ [200+{(450-250)/2]*25/35
= 400 * 0.29 + 300 * 0.71 = 116 + 213 = 329 FCFA/m3
The Economic Benefits of Utility Water Connection if water
now supplied by Vendors (Manila)
Drinking Water
Economic value of service:
A
P0 37
-
Resources saved QsP2AQ0 plus
value of additional consumption
Q0ACQT
Net Benefits to consumers:
D
P2 20
-
Loss to Vendors:
-
P1 5
C
Q0
QS
75% of QT
QT
25% of QT
QT-QS= Incremental Project Water consumed by Paying Users
At P = 5, Q = QT
QsP0AQ0 + Q0ACQT – QsP1CQT
QsP0AQ0 – QsP2AQ0 = P0AP2
Demand for Water from Well
Demand for Washing Water from Manila
Water and Sewerage System
B(0,10)
C
6.0
5.0
A(12618,5.0)
B
DM
Q0
Q1
(10094)(12618)
QT
(25236)
C’
P 0=A’
w
DW
MCw
D’W
B’ Qw0 Qw1
(2524)
At P0Q0 the d = -1, hence at P > P0 then |d| > 1
Example: Value of Water for New Connection
Coping from Vendors for different types of water
(North Cyprus)
Prices of different kinds of water
Bottled water cost $300/m3
Vendor water cost $125/m3
Tanker washing water $1.5/m3
Present Water Coping Costs
0.5% bottled water 0.05($300)
= 1.50
2.5% vendor water 0.025($125)
= 3.13
97% tanker water 0.97($2.00) = 1.94
Water Cost
6.57/m3
Water Storage Cost
0.43/m3
Total Economic Cost of Water
7.00/m3
Demand for Water by Metered Customers (With and
Without Project, Panama Case)
Price
Demand
A
PMeter
P0
B
E
S
F
D
0
Q1
Q0
1,000 gallons per day
Q0 – Q1 = water users reduce their consumption (with project)
Q1ABQ0
= economic loss from the reduction in the quantity consumed
PmeterABP0 = loss in consumer surplus by the metered customers
Demand for Water by Unmetered Customers Who Receive
24-Hour a Day Service without the Project
(Panama Case)
Price
Pmeter
O
A
Q1
Q0
1,000 gallons per day
•
•
Q0 - Q1 = the decrease in quantity consumed (with project)
Q1AQ0 = loss of economic benefits
•
OPmeterAQ0 = total amount of consumer surplus lost
– The loss in consumer surplus is equal to the economic value of their reduced
consumption, Q1AQ0, plus the amount they must will pay to IDAAN, OPmeterAQ1.
– At the same time with the project, they will save the fixed monthly charge of 7 Balboas.
This can be viewed as a gain in consumer surplus that is offset to these loss created by
the volumetric tariff.
Demand for Water by Unmetered Customers Who Cope
with Intermittent Supply Using Overhead Tanks without
the Project (Panama Case)
Price
Demand
A
PMeter
C0
E
B
0
Q1
•
•
•
•
Q0 - Q1
Q1ABQ0
OC0BQ0
Marginal Private
Cost of Coping
Q0 1,000 gallons per day
= decrease in quantity of water consumption
= loss of economic benefits
= economic benefit arising from the resources saved because of the elimination of
their coping costs
7 B + OC0BQ0 - Q1ABQ0 – OPmeterAQ1 = Net impact on these consumers
(monthly charges without project + saving in coping costs - the value of the loss in consumption –
amount now pay)
Demand for Water by Unmetered Customers Not Coping with
Overhead Tanks without the Project
(Panama Case)
Price
Coping
costs (C0)
F
A
Pmeter
B
E
0
•
•
•
•
QIDAAN
Q0
QD
1,000 gallons per day
QD – Q0 = increased in consumption because of reduced cost (with project)
Q0ABQD = value of increased water consumption
QIDAANFAQ0 = vendor charges and time savings resulting from not having to obtain water from
vendor or public taps
net consumer surplus gained to these customers = Q IDAANFAQ0 + 7 B + Q0ABQD - OPmeterBQ0
(saving coping costs + monthly charges without project + value of
increased water consumption - the amount now they have to pay)
Pilfered Water (Panama Case)
Price
Demand
Pmeter
O
A
Q1
Q0
1,000 gallons per day
•
•
•
Q1-Q0
Q1AQ0
OPmeterAQ0
= decrease in quantity of water consumption
= loss of economic benefits
= consumer surplus lost by previously pilfering consumers