In chapter 1 of this book we looked at a number of examples designed to show how the welfare effects of policies or projects can be calculated using measures of consumer and producer surplus. In each case the approach was one of partial equilibrium – only one of the markets affected by the proposed policy was considered. In fact, as discussed at the end of chapter 2, most project or policy changes important enough to warrant a cost-benefit analysis are likely to have repercussions in more than one market as demand and supply curves shift in response to the original exogenous shock.

Incorporating more than one market into a cost-benefit analysis raises both theoretical and practical difficulties. If, to consider some of the examples of chapter 1, a technological improvement leads to a downward shift of the supply curve in one market, the resulting lower price could alter the demand for substitute or complementary goods; factor markets may also have to be considered if the rate of return on capital or wage-rates of workers in the industry are affected by the new production techniques. If a tax is imposed on car sales, the consequences are likely to be felt in many related markets: there may be repercussions in the demand for petrol, in the demand for journeys by public transport, in the costs of firms which use company cars, and so on. In general it appears that many product markets and factor markets should be included in a cost-benefit analysis.