Partial equilibrium versus general equilibrium evaluations or small versus large projects

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 reflect the willingness-to-pay for, say, a change in a price. Therefore, income-compensated (Hicksian) tools must be employed.Many students are exposed first to partial equilibrium benefit-cost analysis as project or policy appraisal where only one primary market is analyzed using consumer surplus. As is demonstrated below the difference between partial and general equilibrium evaluations vanish as the project becomes infinitesimally small and markets are perfectly competitive. However, greater theoretical and empirical complexity often results for the large projects and real world complications that often receive the most attention. Refer to Farrow and Rose (2018) for a fine discussion of these issues while greater technical detail is provided here that may be more familiar to graduate students in economics.

Published in

Title: Teaching Benefit-Cost Analysis : Tools of the Trade
ISBN: 978-1-78643-531-6, eISBN: 978-1-78643-532-3Publisher: Edward Elgar Publishing

SLU Authors

• Kriström, Bengt

  • Department of Forest Economics, Swedish University of Agricultural Sciences
    

UKÄ Subject classification

Economics


Publication identifier

DOI: https://doi.org/10.4337/9781786435323.00011

Permanent link to this page (URI)

https://res.slu.se/id/publ/99011