Transcript Institut für Agribusiness Institut für Agrarpolitik und Marktforschung

Empirical Research Methods
Prof. Dr. Dr. h.c. P. Michael Schmitz
Giessen University
Tashkent; July 2014
Lecture in the frame of the SAMUz project
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Part I
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Cost – Benefit Analysis
Outline
1.
Definition
2.
Principles of applied welfare economics
a) Welfare measurement for individuals
b) Aggregated welfare measurement
3.
Welfare measurement in a closed economy
a) without state intervention:
technological progress
increase of real income
b) with state intervention:
4.
taxes/subsidies
Welfare measurement in an open economy
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Cost-benefit analysis
-what is it about?Government must make decisions regarding the
adoption of public policies and projects.
The branch of economics that deals with
how to evaluate proposed policies/projects
is known as cost-benefit-analysis or applied welfare
economics
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Cost-Benefit-Analysis or Applied Welfare
Economics
Objective
How to use resources optimally to achieve the
maximum well-being for the individualls in
society
or more simply
to help society make better choices
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Principles of applied welfare economics I
• “Welfare economics is the study of how the allocation of
resources affects economic well-being” (Mankiw, 2004, p. 138).
• Assumptions:
- welfare increases with an increase of the consumtion
- the social welfare is the sum of the welfare of all individuals
- utility can be measured cardinally and the utility of individuals can be
compared
- allocation of resources depends on the followed policy
- consumer sovereignty
- partial analysis
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Principles of applied welfare economics
- Starting points • perfect competition
• no external effects
• Kaldor-Hicks criterion (compensation test):
„State B is preferred to state A if at least one individual is made
better off without making anyone worse off – not that all
individuals are actually worse off – by some feasible
redistribution (compensation) following the change. (Just et al.,
2004, p. 32)
• the Pareto criterion is not used
(„if it is possible to make at least one person better off when moving from state
A to state B without making anyone worse off, state B is ranked higher by
society than state A“ Just et al., 2004, p. 15)
• a reference system is used
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Welfare measurement of a single consumer I
Conditions:
• utility is difficult to be observed and to be measured
• approximation for the measurement of utility: monetary
units
• but: income and consumption decisions at various prices are
observed and based on that money-based measurements of
welfare effects are measured (Just et al., 2004, p. 98) !!!!!!
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Four possible Buyers’ Willingness to pay
Buyer
John
Paul
George
Ringo
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Willingness to Pay
(€)
100
80
70
50
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The Demand Curve
Price of
Album (€)
Willingness to pay John
100
80
Willingness to pay Paul
Willingness to pay George
70
50
Willingness to pay Ringo
Demand
0
1
2
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3
4
Quantity of Albums
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Measuring Consumer Surplus with the Demand
Curve
Price of Album
(€)
(a) Price = € 80
John’s Consumer Surplus
(€ 20)
100
80
70
50
Demand
0
1
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2
3
4
Quantity of albums
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Measuring Consumer Surplus with the Demand
Curve
Price of Album
(b) Price = € 70
(€)
Consumer Surplus John
(€ 30)
100
Consumer Surplus
Paul (€ 10)
80
70
50
Total Consumer
Surplus (€ 40)
Demand
0
1
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2
3
4
Quantity of Albums
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How the Price Affects Consumer Surplus
Consumer Surplus at different Prices
Price
A
Initial Consumer Surplus
P1
Additional
B
Consumer
Surplus to Initial
Consumers
P2
D
C
Consumer Surplus
to New Consumers
F
E
Demand
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Q1
Q2
Quantity
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Welfare measurement of a single consumer II
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Welfare measurement of a single consumer II
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Welfare measurement of a single consumer II
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Welfare measurement of a single consumer II
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Welfare measurement of a single consumer II
• Consumer surplus equals buyers’ willingness to pay
for a good minus the amount they actually pay for it.
• Consumer surplus measures the benefit buyers get
from participating in a market.
• Consumer surplus can be computed by finding the
area below the demand curve and above the price.
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Production Costs of Four Possible Sellers
Seller
Cost
(€)
Maria
900
Luise
800
Georgine
600
Grandmother
500
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The Supply Schedule
Price
(€)
Sellers
 900
Maria, Luise, Georgine,
Grandmother
4
800–900
Luise, Georgine,
Grandmother
3
600–800
Georgine, Grandmother
2
500–600
Grandmother
1
 500
None
0
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Quantity
supplied
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The Supply Curve
Price
(€)
Supply
Maria‘s cost
900
800
Luise‘s cost
Georgine‘s cost
600
500
0
Grandmother’s cost
1
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2
3
4
Quantity
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Measuring Producer Surplus with the Supply
Curve
(a) Price = € 600
Price
(€)
Supply
900
800
600
500
’
Grandmother’s
producer
surplus (€ 100)
0
1
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2
3
4
Quantity
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Measuring Producer Surplus with the Supply
Curve
(b) Price = € 800
Price
(€)
Supply
Total producer surplus
(€ 500)
900
800
600
500
Georgine’s producer
surplus (€ 200)
Grandmother’s producer
surplus (€ 300)
0
1
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2
3
4
Quantity
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How the Price Affects Producer Surplus
(a) Producer Surplus at Price P1
Price
Supply
P1
B
C
Producer Surplus
A
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Quantity
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How the Price Affects Producer Surplus
(b) Producer Surplus at Price P2
Price
Additional producer
surplus to initial producers
P2
P1
E
D
Supply
F
B
C
Producer surplus
to new producers
Initial producer
surplus
A
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Q2Institut für Agribusiness
Quantity
Hannover 14.11.07.ppt
Welfare measurement of a single producer
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Welfare measurement of a single producer
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Welfare measurement of a single producer
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Welfare measurement of a single producer
• Producer surplus equals the amount sellers receive for
their goods minus their costs of production.
• Producer surplus measures the benefit sellers get
from participating in a market.
• Producer surplus can be computed by finding the area
below the price and above the supply curve.
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Welfare measurement of a single producer
and consumer
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Principles of applied welfare economics
-aggregation over individuals-
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Principles of applied welfare economics
-aggregation over individuals-
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Social Welfare
-the surplus concept-
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Social Welfare
-the willingness to pay concept-
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Social Welfare
-the willingness to pay concept-
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Social Welfare
-the willingness to pay concept-
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Social Welfare
-the surplus and the willingness to pay concept-
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Social Welfare
Willingness to Pay concept
(direct)
Surplus concept
(indirect)
W = WtP – VC
W = WtP – VC
W = CS + PS
W
WtP
W
CS
PS
VC
Welfare
Willingness to Pay
(„Nutzen“)
variable costs
welfare
consumer’s surplus
producer’s surplus
Both concepts should give the same result!
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Efficieny of the market equilibrium
• With the help of consumer and producer surplus
we can answer the following question:
– is the allocation of resources through the market
function somehow wished?
• The allocation of the resources is efficient when
the maximum total surplus is achieved
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Figure 8 The Efficiency of the Equilibrium Quantity
Price
Supply
Value
to
buyers
Cost
to
sellers
Cost
to
sellers
0
Value
to
buyers
und Marktforschung
Quantity
Equilibrium
quantity
Value to buyers is greater
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to sellers.
Demand
Value to buyers is less
than cost to sellers.
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Learning
Efficieny of the market equilibrium
• With the help of consumer and producer surplus
we can answer the following question:
– is the allocation of resources through the market
function somehow wished?
• The allocation of the resources is efficient when
the maximum total surplus is achieved
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Evaluation of the market equilibrium
• Because the equilibrium outcome is an
efficient allocation of resources, the social
planner can leave the market outcome as
he/she finds it.
• This policy of leaving well enough alone goes
by the French expression laissez faire.
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Market Efficiency
• Three Insights Concerning Market Outcomes
– Free markets allocate the supply of goods to the
buyers who value them most highly, as measured
by their willingness to pay.
– Free markets allocate the demand for goods to the
sellers who can produce them at least cost.
– Free markets produce the quantity of goods that
maximizes the sum of consumer and producer
surplus.
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Social Welfare
Willingness to Pay concept
(direct)
Surplus concept
(indirect)
W = WtP – VC + (C)
W = CS + PS + St
W = WtP – VC + (ER – IE)
W
Welfare
WtP Willingness to Pay
W
welfare
(„Nutzen“)
CS
consumer’s surplus
VC
variable costs
PS
producer’s surplus
(C
Net foreign currency refund St
Budget effects or
ER
Export Refund
taxpayer’s effects
IE
Import Expenditure)
Both concepts should give the same result!
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Welfare effects of income increase
price
 PS
 CS
W
supply
=
+b+c
=+a–b
=+a
+c
 WtP = +a+c+d+e
-[ VC =
+d+e ]
W
= +a+c
b
D1
D0
quantity
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Welfare effects of technological progress
 CS
 PS
W
price
S0
S1
D
f
= +a+b+c
= –a
+d+e
= +b+c+d+e
 WtP = +c +e+f
-[ VC = –b –d +f ]
W
=+b+c+d+e
quantity
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The deadweight loss of taxation
- production tax as amount of tax per production unitMarket
Producer i
MCi newSi new =2q+t
price
S1
price
S0
t
t
MCiSi=2q
PD
P0
P0
PS
a b
d
c
ΔCS=-a-b
ΔPS=-c-d
ΔSt=a+c
ΔW=-b-d
D
QSi,new
QSi
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quantity
QS,D QS,D
quantity
mew
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Figure 1The Equilibrium without International Trade
Price
of Steel
Domestic
supply
Consumer
surplus
Equilibrium
price
Producer
surplus
Domestic
demand
0
Quantity
Equilibrium
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of Steel
quantity
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The Equilibrium without international trade
• Equilibrium Without Trade
– Results:
• Domestic price adjusts to balance demand and supply.
• The sum of consumer and producer surplus measures
the total benefits that buyers and sellers receive.
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The determinants of trade
• Equilibrium Without Trade
– Assume:
• A country is isolated from rest of the world and
produces steel.
• The market for steel consists of the buyers and sellers in
the country.
• No one in the country is allowed to import or export
steel.
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Determinants of trade
• What determines whether a
country imports or exports a
good?
• Who gains and who loses from
free trade among countries?
• What are the arguments that
people use to advocate trade
restrictions?
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The World Price and Comparative Advantage
• If the country decides to engage in
international trade, will it be an importer or
exporter?
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The World Price and Comparative Advantage
• The effects of free trade can be shown by
comparing the domestic price of a good
without trade and the world price of the good.
The world price refers to the price that prevails
in the world market for that good.
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The World Price and Comparative Advantage
• If a country has a comparative advantage, then
the domestic price will be below the world
price, and the country will be an exporter of
the good.
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The World Price and Comparative Advantage
• If the country does not have a comparative
advantage, then the domestic price will be
higher than the world price, and the country
will be an importer of the good.
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Figure 2 International Trade in an Exporting Country
Price
of Steel
Domestic
supply
Price
after
trade
World
price
Price
before
trade
Exports
0
Domestic
quantity
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demanded
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Domestic
demand
Quantity
Domestic
of Steel
quantity
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Figure 3 How Free Trade Affects Welfare in an Exporting Country
Price
of Steel
Price
after
trade
Domestic
supply
Exports
A
B
Price
before
trade
World
price
D
C
Domestic
demand
0
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Quantity
of Steel
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Figure 3 How Free Trade Affects Welfare in an Exporting Country
Price
of Steel
Consumer surplus
before trade
Price
after
trade
Exports
A
C
Producer surplus
before trade
0
World
price
D
B
Price
before
trade
Domestic
supply
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Domestic
demand
Quantity
of Steel
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How Free Trade affects welfare in an
exporting country
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The winners and losers from trade
• The analysis of an exporting country yields
two conclusions:
– Domestic producers of the good are better off, and
domestic consumers of the good are worse off.
– Trade raises the economic well-being of the nation
as a whole.
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The gains and losses of an importing country
• International Trade in an Importing Country
– If the world price of steel is lower than the
domestic price, the country will be an importer of
steel when trade is permitted.
– Domestic consumers will want to buy steel at the
lower world price.
– Domestic producers of steel will have to lower
their output because the domestic price moves to
the world price.
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Figure 4 International Trade in an Importing Country
Price
of Steel
Domestic
supply
Price
before
trade
Price
after
trade
World
price
Domestic
Imports
demand
Quantity
0
Domestic
Domestic
of Steel
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quantity
quantity
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supplied
demanded
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Figure 5 How Free Trade Affects Welfare in an Importing Country
Price
of Steel
Domestic
supply
A
Price
before trade
Price
after trade
B
C
D
Imports
World
price
Domestic
demand
0
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und Marktforschung
Quantity
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of Steel
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Copyright © 2004 South-Western
Figure 5 How Free Trade Affects Welfare in an Importing Country
Price
of Steel
Consumer surplus
before trade
Domestic
supply
A
Price
before trade
Price
after trade
B
World
price
C
Producer surplus
before trade
0
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Domestic
demand
Quantity
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of Steel
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Figure 5 How Free Trade Affects Welfare in an Importing Country
Price
of Steel
Consumer surplus
after trade
Domestic
supply
A
Price
before trade
Price
after trade
0
B
C
D
Imports
Producer surplus
after trade
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World
price
Domestic
demand
Quantity
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of Steel
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Copyright © 2004 South-Western
How Free Trade affects welfare in an
importing country
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The winners and losers from trade
• How Free Trade Affects Welfare in an
Importing Country
– The analysis of an importing country yields two
conclusions:
• Domestic producers of the good are worse off, and
domestic consumers of the good are better off.
• Trade raises the economic well-being of the nation as a
whole because the gains of consumers exceed the losses
of producers.
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The winners and losers from trade
• The gains of the winners exceed the losses of
the losers.
• The net change in total
surplus is positive.
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The effects of a tariff
• A tariff is a tax on goods produced abroad and
sold domestically.
• Tariffs raise the price of imported goods above
the world price by the amount of the tariff.
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The effects of an import tariff (small country)
p
pi
pw
S
a
b
c
d
D
qwA qiA
qiN qwN
q
qiM
qwM
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The effects of an import tariff (small country)
p
pi
pw
S
a
b
c
 PS
 CS
 St
W
d
=+a
=–a–b–c–d
=+c
=–b–d
D
qwA qiA
qiN qwN
q
qiM
qwM
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The effects of an export subsidy (small country)
p
S
pi
pw
a
b
c
d
D
qiD
qwD
qwS qiS
q
qwX
qiX
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The effects of an export subsidy (small country)
p
S
 PS
 CS
 St
W
pi
pw
a
b
c
d
=+a+b+c
=–a–b
= - [b + c + d ]
=–b–d
D
qiD
qwD
qwS qiS
q
qwX
qiX
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The effects of an export subsidy (small country)
p
decrease of
Willingness to
Pay
S
pi
pw
increase of
variable costs
D
qiD
qwD
qwS qiS
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q
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The effects of an export subsidy (small country)
p
decrease of
Willingness to
Pay
S
pi
pw
increase of
variable costs
increase of
export refund
D
qiD
qwD
qwS qiS
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q
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What happens if a country is a big one and
applies a foreign trade policy?
1. Change of domestic price level due to
import tariff and/or export subsidy
2. Change
of
imported/exported
quantities (i.e. lower quantity is
imported and more is exported
3. Increase of supply in the world
markets
4. Decrease of world market prices!
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Why does the higher export supply decrease the
world market price?
Price
EA=Export Supply
= (Exportangebot)
IN=Import Demand
=(Importnachfrage)
Quantity
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Welfare Effects of the guaranteed Price
(Big exporting country)
Price
Assumption: The higher export
supply leads to the decrease of
the world market price from
Pw to P`w
ΔCS = -b-c
ΔPS = b+c+d
ΔST = -(c+d+e+g+h+i)
ΔW = -c-e-g-h-i
Allocation
Losses
TOT
Losses
Quantity
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Summary
• There are various arguments for restricting
trade: protecting jobs, defending national
security, helping infant industries, preventing
unfair competition, and responding to foreign
trade restrictions.
• Economists, however, believe that free trade is
usually the better policy.
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References used, suggested reading
Henrichsmeyer, W. and H. P. Witzke (1994). Agrarpolitik Band 2,
Bewertung und Willensbildung. Stuttgart: Eugen Ulmer Verlag
Just, R. E., Hueth, D. L. and A. Schmitz (2004). The Welfare
Economics of Public Policy, A Practical Approach to Project and
Policy Evaluation. Edward Elgar Publishing.
Mankiw, N. G. (2004). Principles of Economics, 3rd Edition.
Thomson South-Western.
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Part II
www.samuz.org
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Cost – Benefit Analysis
Outline
4.
Recap - Welfare measurement in an open economy
5.
External effects
a) negative externalities
b) positive externalities
6.
Market power and rent seeking: monopoly
7.
Second best theory: a) monopoly and negative ext. effects
b) price support and unemployment
8.
Welfare measurement of multiple price changes
9.
Empirical examples of cost-benefit Analysis
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Welfare measurement of a single consumer
price
Consumer surplus
(CS)
Consumer
expenditure (CE)
p*
CS = WtP – CE
D
q*
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quantity
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Welfare measurement of a single producer
price
S
producer’s surplus
(PS)
Variable Costs (VC)
p*
PS = PR – VC
q*
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quantity
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Welfare measurement of single producers & consumers
price
S
consumer’s surplus
producer’s surplus
p*
D
q*
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quantity
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Social Welfare
Willingness to Pay concept
(direct)
W = WtP – VC + (C)
W = WtP – VC + (ER – IE)
Surplus concept
(indirect)
W
WtP
VC
C
ER
IE
W
CS
PS
St
Welfare
Willingness to Pay
variable costs
Net foreign currency refund
Export Refund
Import Expenditure)
W = CS + PS + St
welfare
consumer’s surplus
producer’s surplus
Budget effects or
taxpayer’s effects
Both concepts should give the same result!
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Exercise
Calculation of CS and PS
Given a demand function: XD = 12 - p and a supply
function: XS = 2 p
1. find p* and x * used in the demand or supply
functions
2. calculate the consumer surplus (CS)
3. calculate the produce surplus (PS) and the total
welfare
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Exercise Answer
CS = 0.5(pp - p *) x *
CS = 0.5(12 - 4)8 = 32
PS = 0.5 (p * - pS) x *
PS = 0.5 (3 - 0) 8 = 16
Total Welfare = CS+PS
Total Welfare = 32+16= 48
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The deadweight loss of taxation
- production tax as amount of tax per production unitMarket
Producer i
MCi newSi new =2q+t
price
S1
price
S0
t
t
MCiSi=2q
PD
P0
P0
PS
a b
d
c
ΔCS=-a-b
ΔPS=-c-d
ΔSt=a+c
ΔW=-b-d
D
QSi,new
QSi
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quantity
QS,D QS,D
quantity
mew
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Figure 5 How Free Trade Affects Welfare in an Importing Country
Price
of Steel
Domestic
supply
A
Price
before trade
Price
after trade
B
C
D
Imports
World
price
Domestic
demand
0
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Quantity
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of Steel
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Copyright © 2004 South-Western
The effects of an import tariff (small country)
p
pi
pw
S
a
b
c
 PS
 CS
 St
W
d
=+a
=–a–b–c–d
=+c
=–b–d
D
qwA qiA
qiN qwN
q
qiM
qwM
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Welfare Effects of the guaranteed Price
(Big importing country)
Assumption: The lower import
demand leads to the decrease of
the world market price from Pw
to P`w
ΔCS = -a-b-c-d
ΔPS = a
ΔST = c+e
ΔW = -b-d+e
Price
Allocation
Losses
TOT
Losses
Q
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Welfare Effects of the guaranteed Price
(Big exporting country)
Price
Assumption: The higher export
supply leads to the decrease of
the world market price from
Pw to P`w
ΔCS = -b-c
ΔPS = b+c+d
ΔST = -(c+d+e+g+h+i)
ΔW = -c-e-g-h-i
Allocation
Losses
TOT
Losses
Quantity
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Externalities
An externality refers to the uncompensated impact of one person’s
actions on the well-being of a bystander (Mankiw, 2004)
Case when an action of an economic agent affects the utility or
production possibilities of another in a way that is not reflected in
the market place (Just et al., 2004)
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Externalities
• Appear when there is influence of the economic activities of
producer or consumers (economic units) over other
economic units, they cause advantages or disadvantages
without being evaluated
• Externalities cause markets to be inefficient, and thus fail to
maximize total surplus
• Negative externalities lead markets to produce a larger
quantity than is socially desirable.
• Positive externalities lead markets to produce a smaller
quantity than is socially desirable.
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Negative external effects

How can I show in this
diagram the social effects?
price
SMC private
With the help of the
damage function!
D
quantity
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Damage function
= Relationship between production quantities
and negative external effects
External effect in
monetary units
Negative external effect (NEE) =
¼ q2
Marginal External Effect (MEE) =
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NEE 1
 q
q
2
quantity
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Negative external effects (without trade)
S*MC social=MC private + MEE
price
SMC private
MEE (marginal external effect)
D
qsocial qprivate
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quantity
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Negative external effects (without trade)
Reference system: qsocial
S*
price
ΔVCsocial = ΔVCprivate + ΔVCext
=c+d+d
=c+d+a+b
SMC private
psocial
pprivate
a
b
MEE
c
d
qsocial qprivate
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D
quantity
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Internalising an externality
Altering incentives so that people take into
account the externality and act analogous
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The Types of Private Solutions
• Moral norms and social sanctions
• Voluntary organizations (foundations and
associations)
• Contracts between parties
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Coase Theorem:
The private economic actors can solve the
problem of externalities among themselves.
Whatever initial distribution of rights, the
interested parties can always reach a bargain in
which everyone is better off and the outcome
is efficient.
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Why private solutions do not always work?
• Transaction costs
• Breakdown of agreements
• Coordination problem of the large number of
interested parties
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Internalising an externality
• Achieving the Socially Optimal Output
• The government can remedy an externality by
Regulation, i.e. making certain behaviours
either required or forbidden or
• by using market based policies like imposing a
tax (or a subsidy) on the producer to reduce (or
increase) the equilibrium quantity to the
socially desirable quantity. Example Pigovian
Taxes
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Internalising an externality
Pigovian taxes
S* MC social
price
SMC private
P1
Po
d
a
e
f
b c
g
ΔCS =
ΔPS =
ΔST =
ΔEA1 =
ΔW =
-a-b-c
-e-f-g
a+b+e+f
g+c+d
+d
P2
1 External Agents
D
qsocial
qprivate
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quantity
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Positive external effects (with trade)
price
Import tariff:
SMC private
ΔU
-(ΔVCs)
-(ΔIE)
ΔW
S*
=
=
=
=
-d-e
-(+c)
-(-b-c-e)
+b-d
by-product distortion
Pi
Pw
Producer subsidy:
a
b
c
qS,p qS,s
d
e
qD,2
D
qD,1
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quantity
ΔU
-(ΔVCs)
-(ΔIE)
ΔW
=
=
=
=
0
-(+c)
-(-b-c)
+b
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Monopoly
price
n
S   MCi   MCmonopoly
i 1
Pcomp
.
D
qcomp.
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quantity
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Monopoly
price
n
S   MCi   MCmonopoly
Pmon
i 1
Pcomp.
D selling price function
qcomp.
qmon.
quantity
MRmonopoly
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Figure 2 Demand Curves for Competitive and Monopoly Firms
(a) A Competitive Firm’s Demand Curve
Price
(b) A Monopolist’s Demand Curve
Price
Demand
Demand
0
Quantity of Output
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0
Quantity of Output
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Copyright © 2004 South-Western
Figure 3 Demand and Marginal-Revenue Curves for a Monopoly
Price
$11
10
9
8
7
6
5
4
3
2
1
0
–1
–2
–3
–4
Demand
(average
revenue)
Marginal
revenue
1
2
3
4
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5
6
7
8
Quantity of Water
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Copyright © 2004 South-Western
Figure 4 Profit Maximization for a Monopoly
Costs and
Revenue
2. . . . and then the demand
curve shows the price
consistent with this quantity.
B
Monopoly
price
1. The intersection of the
marginal-revenue curve
and the marginal-cost
curve determines the
profit-maximizing
quantity . . .
Average total cost
A
Demand
Marginal
cost
Marginal revenue
0
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Q
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und MarktforschungMAX
Q
Quantity
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Copyright © 2004 South-Western
Figure 5 The Monopolist’s Profit
Costs and
Revenue
Marginal cost
Monopoly E
price
B
Monopoly
profit
Average
total D
cost
Average total cost
C
Demand
Marginal revenue
0
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Quantity
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Copyright © 2004 South-Western
Monopoly
price
n
S   MCi   MCmonopoly
Pmon
i 1
a
Pcomp
.
b
ΔCS
=
ΔPS
=
Δbudget=
ΔW
=
c
-a-b
+a-c
0
-b-c
D selling price function
qmon.
qcomp.
quantity
MRmonopoly
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Monopoly and negative external effects
price
Ssocial
Sprivate
Pmon
-
-
Pcomp
.
D selling price function
qmon. qs qcomp.
quantity
MRmonopoly
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Monopoly and negative external effects
price
Ssocial
Sprivate
Pmon
Pcomp
.
D selling price function
qmon. qs qcomp.
quantity
MRmonopoly
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Price support and unemployment
price
D
Sprivate
Pi
-
-
Pw
quantity
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Price support and unemployment
price
D
Sprivate
Ssocial
Pi
a
b
Pw
e
c
d
ΔU
-(ΔVC)
ΔER
-(ΔIE)
ΔW
=
=
=
=
=
-b-e
-(+g)
e+f+g
0
-b+f
f
g
quantity
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Welfare measurement of multiple price changes
Input (factor) market
wage
W0
Output market
price
S(W0)
a
Value of marginal product
(demand curve for labor)
L0
hrs of labour
PS = total revenue – variable cost
= value of product – wage
=a
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quantity
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Welfare measurement of multiple price changes
a) Factor price changes (falls), by constant output prices
Input (factor) market
wage
W0
W1
Output market
S(W0)
price
a
b
_
P0
c
d
L0
y
S(W1)
z
x
D
L1
hrs of labour
q0
q1 quantity
ΔPS = b+c = z
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Welfare measurement of multiple price changes
b) Output price changes (increases), by constant input prices
Input (factor) market
Output market
price
wage
_
P1
b
W0
S(W0)
a
P0
D (P1)
D (P0)
L0
L1
hrs of labour
q0
q1 quantity
ΔPS = a = b
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Welfare measurement of multiple price changes
c) Simultaneous changes of input & output prices, 1 variable factor
Input (factor) market
price
wage
W0
Output market
v
P1
x
z
y
S(W0)
W1
a
b
P0
D (P1)
c
S(W1)
d
D (P0)
L0
L1
quantity
hrs of labour
ΔPS = x+y+z
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ΔPS = a+b+d
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Welfare measurement of multiple price changes
- Sequential measurement of welfare b)
a)
P0 → P1, W0 conts.
W0 → W1, P1 conts.
ΔPS(output)
ΔPS(input)
ΔPS
=
=
=
W0 → W1, P0 conts.
P0 → P1, W1 conts.
ΔPS(input)
ΔPS(output)
ΔPS
+a
+y+z
a+y+z
=
=
=
+y
+a+b
a+b+y
ΔPS = x+y+z = a+b+d = a+y+z = a+b+y
b=z
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a=x
d=y
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Empirical Measurement of Economic Policies
Numeric equilibrium models have been developed to evaluate
ex ante effects of economic policies: Policy Impact Studies
General Equlibrium Models explain the whole economies,
whereas the Partial Equlibrium Models are usefull for more
elaborate sectoral analysis
•Comparative static-Dynamic
•One product-multi product
•One region-multi region
•Homogenous goods-heterogenous goods
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Computable General Equilibrium (CGE)
The General Equilibrium models consist of a system of equations,
which cover all the money and goods flows in an economy
For the calculation of General Equilibrium Models variables must
be determined eather as the model-endogenous or exogenous
By recursive iteration all markets are simultaneously being brought
into the equilibrium.Therefore, wages, prices, investment and
growth, state budget, export and import volumes, interest rates and
other variables can be determined.
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Social accounting Matrix SAM
A SAM is a square matrix in which each transaction is
recorded only once in a cell of its own – it is
conventionally agreed that the entries made in rows
represent incomes or receipts, whilst the entries
made in columns represent outlays or expenditures so, for each row there is a corresponding column, i.e.
for every income there exists a corresponding
expenditure, with their totals being equal.
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Thank you for your attention!
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