Hostname: page-component-669899f699-g7b4s Total loading time: 0 Render date: 2025-04-26T14:50:57.682Z Has data issue: false hasContentIssue false
  • English
  • Français

Indirect Effects in Cost-Benefit Analysis

Published online by Cambridge University Press:  19 January 2015

Jan Rouwendal
Jan Rouwendal*
Affiliation:
VU University
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

The debate about the effectiveness of investments in public infrastructure initiated by Aschauer suggests that there may be substantial discrepancies between the results of conventional cost-benefit analysis and the ultimate effects of such investments on welfare. This paper takes a closer look at this issue by investigating the existence of secondary or indirect effects under conditions of monopolistic competition. We find that such effects will in general exist, and that they are potentially large, but that they can also be negative, depending on the specification of the model. With linear demand curves, indirect effects can be positive, zero or negative, with Dixit-Stiglitz they are always nonnegative and closely related to the taste for diversity, while with the logit model they are always identically zero. Free entry reinforces the positive indirect effects in the Dixit-Stiglitz model, and causes negative indirect effects in the logit model. Given this variety of results, robust empirical measurement of the indirect effects appears to be difficult.

Keywords

project evaluationindirect (or secondary) effectsmonopolistic competition
Type
Article
Information
Journal of Benefit-Cost Analysis , Volume 3 , Issue 1 , 25 January 2012 , pp. 1 - 27
Copyright
Copyright © Society for Benefit-Cost Analysis 2012

References

Anderson, J.E. (1976) The Social Cost of Input Distortions: A Comment and a Generalization. American Economic Review, 66, 235-238.Google Scholar
Anderson, S.P., de Palma, A. and Thisse, J.-F. (1992) Discrete Choice Theory of Product Differentiation, MIT Press.Google Scholar
Aschauer, D.A. (1989) Is Public Expenditure Productive? Journal of Monetary Economics, 23, 177-200.Google Scholar
Baldwin, and Venables, (1995) Regional Economic Integration. In: Grossman, G. and Rogoff, K. (eds.) Handbook of International Economics, III, North Holland, Amsterdam.Google Scholar
Baldwin, R., Forslid, R., Martin, P., Ottaviano, G. and Robert-Nicoud, F. (2003) Economic Geography and Public Policy, Princeton University Press, Princeton.Google Scholar
Berry, S., Levinsohn, J. and Pakes, A. (1995) Automobile Prices in Market Equilibrium. Econometrica, 63, 841-890.Google Scholar
Bhatia, R., Cestti, R.Scatasta, M.Malik, R.P.S. (2009) Indirect Economic Impacts of Dams: Case Studies from Egypt, India and Brazil. Academic Foundation.Google Scholar
Blackorby, C. and Donaldson, D. (1999) Market Demand Curves and Dupuit-Marshall Consumers’ Surplus: A General Equilibrium Analysis. Mathematical Social Sciences, 37, 139-163.CrossRefGoogle Scholar
Boardman, A., Greenberg, D.Vining, A. and Weimer, D. (2005) Cost Benefit Analysis: Concepts and Practice. Prentice Hall.Google Scholar
Bröcker, J. (1998) Welfare Effects of a Transport Subsidy in a Spatial Price Equilibrium. Mimeo, Technische Universität Dresden.Google Scholar
Chipman, J.S. and Moore, J.C. (1976) The Scope of Consumers’ Surplus Arguments. In: Tang, A.M. et al. (eds) Evolution, Welfare and Time in Economics, Lexington Books, 69-123.Google Scholar
Chipman, J.S. and Moore, J.C.. (1980)Compensating Variation, Consumers’ Surplus and Welfare. American Economic Review, 70, 933-949.Google Scholar
Diewert, E. (1983) Cost Benefit Analysis and Project Evaluation: A Comparison of Alternative Approaches. Journal of Public Economics, 22, 265-302.CrossRefGoogle Scholar
Dixit, A.K. and Stiglitz, J.E. (1977) Monopolistic Competition and Optimum Product Diversity. American Economic Review, 67, 297-308.Google Scholar
Drèze, J. and Stern, N. (1987) The Theory of Cost Benefit Analysis. In: Auerbach, A.J. and Feldstein, M.Handbook of Public Economics, II, Elsevier, 909-989.Google Scholar
Eckstein, O. (1958) Water Resource Development: The Economics of Project Evaluation. Harvard.Google Scholar
Fujita, M. and Thisse, J.-F. (2002) Economics of Agglomeration. Cambridge University Press.Google Scholar
Gasmi, F., Laffont, J.J. and Vuong, Q.H. (1992) Econometric Analysis of Collusive Behavior in the Soft-drink Market. Journal of Economics and Management Strategy, 1, 277-311.Google Scholar
Gramlich, E.M. (1994) Infrastructure Investment: A Review Essay. Journal of Economic Literature, 32, 1176-1196.Google Scholar
Hausman, J.A., Leonard, G. and Zona, D. (1994) Competitive Analysis with Differentiated Products. Annales d’Econometrie et de Statistique, 34, 159-180.Google Scholar
Hicks, J.R. (1946a) L’Economie de Bien-Être et la Theorie des Surplus du Consummateur. Bulletin de l’Institut des Sciences Economie Appliquée, 2, 1-17.Google Scholar
Hicks, J.R. (1946b) Quelques Applications de la Theorie des Surplus du Consummateur. Bulletin de l’Institut des Sciences Economie Appliquée, 2, 18-28.Google Scholar
Holtz-Eakin, D. and Lovely, M.E. (1996) Scale Economies, Returns to Variety and the Productivity of Public Infrastructure. Regional Science and Urban Economics, 26, 105-123.Google Scholar
Jacobsen, S.E. (1979) On the Equivalence of Input and Output Market Marshallian Surplus Measures. American Economic Review, 69, 423-428.Google Scholar
Moreno, R., Lopez-Bazo, E. and Artis, M. (2002) Public Infrastructure and the Performance of Manufacturing Industries: Short- and Long-run Effects. Regional Science and Urban Economics, 32, 97-121.CrossRefGoogle Scholar
McFadden, D. (1981) Econometric Models of Probabilistic Choice, pp. 198-271 in: Manski, C.F. and McFadden, D. (eds.) Structural Analysis of Discrete Data with Econometric Applications, MIT Press, Cambridge (Ma).Google Scholar
Munnel, A.H. (1992) Infrastructure Investment and Economic Growth. Journal of Economic Perspectives, 6, 189-198.Google Scholar
Newbery, D. (1998) Efficiency Benefits of Transport Cost Reductions, report prepared for SACTRA, department of applied economics, Cambridge.Google Scholar
Ottaviano, G., Tabuchi, T. and Thisse, J.-F. (2002) Agglomeration and Trade Revisited. International Economic Review, 43, 409-435.Google Scholar
Pigou, A.C. (1920) The Economics of Welfare. McMillan.Google Scholar
Schmalensee, R. (1971) Consumers’ Surplus and Producer’s Goods. American Economic Review, 61, 682-687.Google Scholar
Schmalensee, R. (1976) Another Look at the Social Valuation of Input Price Changes American Economic Review, 66, 239-243.Google Scholar
Sugden, and Williams, (1978) The Principles of Cost Benefit Analysis. Oxford University Press, Oxford.Google Scholar
Tirole, J. (1988) The Theory of Industrial Organisation. MIT Press, Cambridge (Ma).Google Scholar
Venables, A.J. (1996) Equilibrium Locations of Vertically Linked Industries. International Economic Review, 37, 341-359.Google Scholar
Venables, A.J. and Gasiorek, M. (1998) The Welfare Implications of Transport Improvements in the Presence of Market Failure, paper prepared for SACTRA, LSE/Univ. of Sussex.Google Scholar
Wisecarver, D. (1974) The Social Cost of Input-Market Distortions. American Economic Review, 64, 359-372.Google Scholar