Cost-Benefit Analysis Concepts and Practice

A key concept for valuing policy impacts is change in social surplus. As discussed in Chapter 3, changes in social surplus are represented by areas, often as triangles or trapezoids, bounded by supply and demand schedules (curves). Measurement of changes in social surplus is relatively straightforward when we know the shapes (functional forms) and positions of the supply and demand curves in the relevant primary market, before and after the policy change. In practice, however, these curves are usually not known. Analysts have to estimate them from available data or find alternative ways to measure benefits and costs. In this chapter, we consider estimation of demand curves.