Opción de desarrollo 2. (Anexo 14.4)

10. The EP of a project input is the economic cost per unit of input. The EP is equal to the economic cost (EC) of the project input divided by the quantity demanded (QP).

11. The competitive market model again provides a conceptual framework for valuing a project input (see Figure 3). The input demand by the project is represented by a rightward shift in the total demand curve for the input. The market price of the project input rises from PWO to PW and the total quantity demanded increases from QWO to QW. At the higher price, the new project bids some supply away from existing projects. The incremental quantity demanded is (QW - QWO) and the nonincremental quantity demanded is [QP - (QW - QWO)]. The economic cost of the project input is therefore made up of two parts: the economic cost of the incremental quantity demanded and the economic cost of the nonincremental quantity demanded.

12. Without any distortions in commodity or factor markets, the EC of the incremental quantity demanded by the project is represented by the light-shaded area under the supply curve, defined by PWO, PW, QW, and QWO. It comprises the incremental cost of increasing supply to meet project demand.

Pw Pwo Qe Qwo Qw Qp Dwo Dw S

13. The EC of the nonincremental quantity demanded by the project is represented by the dark-shaded area under the without project demand curve, defined by PWO, QWO, QE, and PW. It comprises the economic benefit foregone by the without project buyers of the project input, as measured by their willingness to pay.

14. The total EC of the project input is equal to the average market price with and without the project multiplied by the quantity of input demanded by the project. The EP is equal to the EC divided by the quantity of input demanded.

15. The input market represented in Figure 3 is perfectly competitive. However, with government intervention, the market price, demand price, and supply price may differ. Figure 4 shows the result of an ad valorem consumption tax and production subsidy. The consumption tax shifts the demand curve leftward by the amount of the tax, while the production subsidy shifts the supply curve rightward by the amount of the subsidy.

16. With no distortions in other markets, the EC of incremental input (QS) is shown by the area under the before-subsidy supply curve, which is equal to the product of the average supply price (SP ) with and without the project, and QS. The EC of nonincremental input (QD) is shown by the area under the after-tax demand curve, which is equal to the product of the average demand price (DP ) with and without the project, and Q_D.

D Dw (-tax) Dwo (-tax) S (+subsidy) DP_wo SP_w DPw SPwo MPw MPw Qd Qs Qp

Figure 4. Economic Cost: Distorted Input Market

EC = (DP . Q_D) + (SP . Q_S) where DP = 0.5 (DPWO + DPW); and

SP = 0.5 (SPWO + SPW) EP = EC/QP

IV.

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17. The EP can also be expressed in terms of the price elasticities of demand and supply for the project output. The EP is based on the weighted average of the demand and supply price of project output, with the weights depending on the price elasticities of demand and supply.

EP = DP . dw + SP . sw where dw is demand weight, and

sw is the supply weight

dw = (-DE . QD/QS)/[SE - DE (QD/QS)] sw = SE/[SE - DE (QD/QS)]

sw = 1 - dw

where D_E is the price elasticity of demand, and S_E is the price elasticity of supply

Where distortions appear in other commodity or factor markets, the demand price and supply price have to be adjusted for these.

V.

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18. In principle, the framework provided here can be applied to any project output or input. It is especially relevant on the output side to analyze the effects of a project producing nontraded outputs, where adjustments of both quantities and prices are confined to the domestic economy and are therefore likely to be larger. It can also be applied to all types of project impact, to materials and services, equipment, construction, and labor, as well as to factors of production more broadly defined, such as capital or foreign exchange. In each case, the approach requires the analyst to assess the market structure for a good, and to work out what the incremental and nonincremental project effects will be.

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1. The economic price (EP) of traded goods and services is determined within the conceptual framework outlined in Appendix 9. Traded goods and services are those whose production or use by a project has an effect on the country’s balance of payments, because either the goods and services themselves are exported or imported, or because they are substitutes for goods that are exported or imported.

2. Typically, Bank-assisted projects are small relative to the size of world markets. Projects face an infinitely elastic demand for traded output and an infinitely elastic supply for traded input. Consequently, world market prices are not affected by project supply of output or project demand for input This represents a special case where increases in the supply of output or in the demand for inputs have no effect on their prices.

3. The valuation of traded goods can be illustrated for the four main cases: exported output, importable output, imported inputs, and exportable inputs. If world demand is elastic, exported output is incremental to world supply and the EP is based on the demand price (DP), which is the free on board (FOB) price. This compares with the financial price (FP) of an export at the border, which can be given by the FOB price less net export taxes (t = export tax less export subsidy) (see Figure 1). If world supply is elastic, importable output is nonincremental to world demand and the EP is based on the supply price (SP), which is the cost insurance freight (CIF) price. This compares with the FP at the border, which is the CIF price plus net import tariff (t = import tariff less import subsidy) (see Figure 2).

Figure 1. Gross Economic Benefit of Exported Outut

Price

Quantity

Figure 2. Gross Economic Benefit of Importable Output Price Quantity EP=DP=FOB FP=FOB-t FP=CIF+t EP=SP=CIF

S(P) = with project supply. D S S(P) D S S(P)

4. If the world supply is inelastic, then imported input is incremental to world demand and the EP is based on the SP, which is the CIF price. The FP at the border of an imported input is the CIF price plus import tariff less the import subsidy (see Figure 3).

5. If world demand is inelastic, an exportable input is nonincremental to world demand and the EP is based on the DP, which is the FOB price. The FP at the border of an exportable input is the FOB price less export tax plus export subsidy (see Figure 4).

6. The economic price of traded goods need to be adjusted for the location and price level in which the analysis is being conducted. In most cases, the price level is the price level of the project and the location is the project location. The world market price (WMP) needs to be adjusted to the project situation by subtracting or adding handling, distribution, transport, and processing costs between the project location and the port of entry—the result is the border price equivalent value (BPEV). All these nontraded costs need to be expressed in economic prices (see Appendix 11). 7. When this adjustment has been made, the BPEV can be compared with the FP of the same project output or input at the project location FP(P). This comparison can be expressed in the form of a conversion factor (CF). The CF is given by

CF =BPEV or Border Price Equivalent Value

FP(P) Financial Price at Project

Where economic prices are considerably below financial prices, the CF will be significantly less than 1. This will apply for highly protected outputs and inputs. Where economic prices are considerably above financial prices, the CF will be significantly more than 1. This will apply for export products that are heavily taxed.

Figure 3. Gross Economic Cost of

Imported Input Figure 4. Gross Economic Cost of _{Exportable Input}

Price FP=CIF+t EP=SP=CIF Quantity D D(P) S Quantity Price EP=DP=FOB FP=FOB-t D(P) D S