Teaching Benefit-Cost Analysis
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Teaching Benefit-Cost Analysis

Tools of the Trade

Edited by Scott Farrow

Teaching Benefit-Cost Analysis provides detail and inspiration that extends and clarifies standard textbooks. Each short, self-contained module includes guidance to additional sources while many also provide class exercises. Classes for advanced undergraduates, practitioners, or Masters students could especially apply these tools of the trade.
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Chapter 5: Partial equilibrium versus general equilibrium evaluations or small versus large projects

Per-Olov Johansson and Bengt Kriström

Abstract

The typical approach in benefit-cost analysis is partial equilibrium. Thus, a policy’s impacts on other markets are ignored. We discuss partial equilibrium evaluation versus general equilibrium ones. It is shown that the rules coincide when markets are perfect and the considered policy is (infinitesimally) small. If changes in some parameters are discrete, the approaches produce different outcomes, in general. In particular, market-based (Marshallian) demand curves no longer reflects the willingness-to-pay for, say, a change in a price. Therefore, income-compensated (Hicksian) tools must be employed. Greater technical detail is expected here that may be more familiar to graduate students in economics.

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