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GE Welfare

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Welfare analysis for a vertically integrated economyJHS Figure 9.1

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Bottom line: When all markets are in equilibrium, the net

welfare consequences can be measured entirely in the final

goods market using the general equilibrium supply curve, Sn*. 18

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Bottom line: Winners and losers are not identified in the GE

welfare measure.

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Now “a little” math

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Secondary Impact Analysis

Source: http://finance.yahoo.com/news/republic-services-announces-187-million-171600976.html

$187 million in total Gross

State Product (economic impact)

2,800 direct and indirect jobs;

1.44 jobs created for every

full-time employee

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Simple Input-Output Analysis

Example taken from http://barnyard.syr.edu/mat183/l32/

Three sectors. For each $ output they demand how many

dollars of input from the other sector?

For example, to provide $1 worth of service, the service sector

requires $.04 worth of raw materials, $.03 worth of services, and

$.01 worth of manufactured goods.

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Simple Input-Output Analysis

0.02 0.04 0.04

0.05 0.03 0.01

0.20 0.01 0.10

A

=

0.01 0.02 0.005

0.005 0.003 0.003

0.025 0.009 0.018

A A

⋅ =

3

0.001 0.001 0.001

0.001 0.000 0.001

0.005 0.001 0.003

A

=

In one iteration

In the second iteration

In the third iteration

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Simple Input-Output Analysis

1 0 0

Direct Impact = = 0 1 0

0 0 1

I

( ) 1

1

i

i

I A I A

∞−

=

+ = −Direct plus indirect

impacts

1.032 0.043 0.046

0.056 1.033 0.014

0.230 0.021 1.122

=

So, $1 spent in raw materials will generate $0.03 in additional raw

material purchases, $0.043 in services and $0.046 in manufacturing.29

IO analysis and GE Welfare

• IO multipliers can be thought of as shifts in

the input demand curves in the related

sectors.

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IO analysis and GE Welfare

• IO multipliers can be thought of as shifts in

the input demand curves in the related

sectors.

• What do we know about how such effects

should be handled in estimating the

associated changes in economic welfare?

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Raw

4

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aterials

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1

1.032 0.0 3 0 046

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0.014

0.230 0 02 1g 1 1. 22

33

Raw

4

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.

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Raw M

0

aterials

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1

1.032 0.0 3 0 046

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Raw

4

Mater

.

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rvices Manufactu

ring

Raw M

0

aterials

Se rvices

Manuf

1

1.032 0.0 3 0 046

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35

Raw

4

Mater

.

ials Se

rvices Manufactu

ring

Raw M

0

aterials

Se rvices

Manuf

1

1.032 0.0 3 0 046

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0.014

0.230 0 02 1g 1 1. 22

36

Raw

4

Mater

.

ials Se

rvices Manufactu

ring

Raw M

0

aterials

Se rvices

Manuf

1

1.032 0.0 3 0 046

.056 .033

ac tu .rin

0.014

0.230 0 02 1g 1 1. 22

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Raw

4

Mater

.

ials Se

rvices Manufactu

ring

Raw M

0

aterials

Se rvices

Manuf

1

1.032 0.0 3 0 046

.056 .033

ac tu .rin

0.014

0.230 0 02 1g 1 1. 22

38

Raw

4

Mater

.

ials Se

rvices Manufactu

ring

Raw M

0

aterials

Se rvices

Manuf

1

1.032 0.0 3 0 046

.056 .033

ac tu .rin

0.014

0.230 0 02 1g 1 1. 22

Some examples

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To address second-hand smoke, a county has decided to impose a tax on cigarettes.You are responsible for carrying out a cost-benefit analysis of

this project. Consider each of the following consequences.

Should they be taken into account under the direct impacts or in

the indirect/secondary/general-equilibrium consequences?

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Direct Welfare Relevant?

Yes No Yes Maybe No

Reduced consumer surplus by cigarette

consumers.

Reduced income to the workers who must

be laid off because the tobacco stores’

sales have fallen.

Decreased sales of food because cigarette

consumers now have less disposable

income.

Reduced profits by tobacco stores

To address second-hand smoke, a county has decided to impose a tax on cigarettes.You are responsible for carrying out a cost-benefit analysis of

this project. Consider each of the following consequences.

Should they be taken into account under the direct impacts or in

the indirect/secondary/general-equilibrium consequences?

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Direct Welfare Relevant?

Yes No Yes Maybe No

Reduced income by suppliers of cigarettes

to the stores in the county.

Decreased revenue for at hospitals, since

cigarette smokers smoke less and get

sick less.

Improved welfare for people who are

exposed to less second-hand smoke

Reduced purchases of groceries by the

workers who were laid off.

Types of distortions

in secondary markets

• Unemployment due to labor market

rigidities or minimum wage laws.

• Taxes

• Market power

• …

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Some important points from

Griffin Handout #11Conventional Advice: We typically do not have

adequate empirical grounds for determining whether

the net secondary welfare effects of a new activity

exceed the net secondary welfare effects that "were"

being created by those same funds (before they were

redirected to the new activity). Under such

conditions, it is commonly sensible as well as ethical

to presume no net increase in secondary welfare

effects.”

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Some important points from

Griffin Handout #11Instances in which claims of secondary effects may

have merit:

1. When funds from outside make a project

possible.

2. When a policy or project has a stimulating effect

on a depressed or undeveloped economy.

3. When you have to measure secondary impacts, it

is best to use general equilibrium methods (JH&S

chapter 9) or appropriately constructed

computable general equilibrium models. 44