1. Connected to The concept of pure competitionis the requirement that complete information must be
available to those in the market or considering entering it. Such information obviously includes prices of
commodities but may also include other conditions about the market place. If complete information is
not available to all producers and consumers, then the market mechanism can fail.
A fourth reason for market failure is the cost of transaction’s . as indicated in Buchanan ‘s example , free
trade is the central mechanism of a free market. But as the example also shows, there is effort involved
in those changes. If the problem were expanded beyond the roomattes to the entire dormitory. The
exchange could be come extremely time consuming. The gain in efficiency would be weighed against the
cost of time involved in transactions. However, the ideal model presumes no transaction costs. A fifth
reason why the market may fail is its inability to stop those who have not paid for a good from using it,
preventing the price system for allocating resources efficiently. National defense is the cklassic example
for this kind of public good, but there are many other example of public goodor service from which
individuals cannot buy independently. A last reason foe failure of market is that of externalities:
exchangeswhich affect other than the producers and consumers directly involved. Externalities can be
either negative or positive. This is such an important topic that well discuss is separately in a later
section.
COSTS
The concept of costs is central to policy analysis. Economics view costs as resources employed. Nearly
every public action that can be imagined involve the use of resources. Those resources, be the tax
dollars or other types of resources. Must usually be different from other uses. Thus, it has been argued
that the term “opportunity cost” be substituted for the simler term “cost “in policy analysis.’’ Clearly,
the result of analysis might be very different if some of the major resources to be employed were
currently idle. According to Bickner,” common fitpall in policy analysis is “ignoring cost altogether”. For
example forsaking cost for some every derisable goal: “price is no object.”more subtle dangers include
counting only a partion of total program costs. Several common errors are made. The first to identify
program costs as synonymous with cash outlays—what the government pays directly for the endeavor.
This is seldom the only cost connected with a program. A second error is to identify and count only
those costs that are monetarizable. Most public action involve costs that are not monetarizble, and
some that are not tangible. However, those costs may still be very important. Long-run costs also are
often ignored.
Another pitfall is to ignore costs when they fall to people or governments outside the client’s concern. A
very common example of this when analyst count only the local government’s costs as the total cost of
the project and weight them against the total benefit accruing to the local unit of government. Cost
sharing from other levels of government could event make building pyramids look desirable if a local
government counted only its own cost. If our actions have effects than fall outside our client’s purview,
be they benefits or costs, they should not be ignored. Closely connected to this idea which the one that
ascribersequal value to each dollar of cost (or benefit) no matter what its orogin. This is a questions of
equilty : is a dollar impact on one group equal equal to a dollar on another?” many people presume that
the actual cost of a proposal is a fact than merely needs to be established, where as benefits or effects

2. are much more complex and difficult concept to measures. In fact there is seldom a clear single answer
to what a proposal costs are. Or an easy method for establishing them. Three other costs-related issues ,
discussed below are marginal costs, sunk costs, and opportunity costs.
For any proposal the analyst must first measures all direct costs. Included are-one –time fixed costs,
borrowing costs, and operating and maintenance costs. These should be agregatedfor the duration of
the program, which is usually the time frame chosen to analyze the proposal. For many type of
evaluations the analyst will also wish to measures indirect costs-that is, the costs connected to the
impact of the proposal (e.g building parking garage may cause increased downton traffic and its
attendant costs). These indirect costs include those to be experience by our client or governmental units
and its population, as well as those to be felt by other governments or populations. These may or may
not be tangible or monetarizable.
A final warning about the concept of costs in order. Because some costs are easily identified an
monetarizable, policy analyst are attracted to them as an item worthy of much analitycal time, and
indeed they are. But don’t forget the larger pictures which includes answering these questions:is this an
effective proposa,l. what are its impact , on whom, and is it feasible?planning and policy analyst must go
far beyond cost analysis if it so yield rich information for decision makers.
Benefits
Benefits are really the flip side of costs. In fact, sometimes they are reffered to as negative costs( cost
saving). Benefits may be associated, but not necessarily, with the goal of a proposal- the impact the
clients wanted to achieve. Many of the observations we will take about costs apply equally well to
benefits. Benefits can be direct, tangible or not, monetarizable or not, ascribable to the client’s
governmental unit or not, and short-term or long-term. Many benefits are easilymeasured because they
have a value in the marketrplace. That is, the benefit is a good service that is generally bought and sold
and whose price can be fairly easily established, presuming a market without major distortions. (see the
discussion of “the free-marketmodel.”)
A method for establishing the value of benefits (or costs) when market prices are unavailable or
distorted is through the use of shadow prices . shadow prices are usually derived by establishing the
value of the benefits in another context, a context that is viewed as a perfectly competitive market. An
example is provided by a benefit whose market price is distorted by a type or tax. The “shadow” or
‘accounting Price” of the good would be its economic value free of the distortion caused by taxaxion.
Shadow-pricing techniques have been used, for example, to establish the value of publicly provided
recreational benefits that have no established market value.
A critical issue in establishing the benefits of a public action is, of course, porecasting the impact of the
action with a level of certainty. But even if that can be done, the task of valuing those impact remains.
The same is true of costs.
Externalities.
An externality is a phenomenon or effect to which the market assigns no value, positive or negative, but
which has a societal cost or benefit. For example, if a producer of bread pay the same price to wrap it in

3. plastic or paper, the market price of the wrapping does nor replect the fact that the paper, being
organic, can be disposed of more cheaply than the plastic. Neither the bread manufacturer nor the
customers pay for this, but city taxpayers will in increased landfill costs. Externatilities can be generated
by both producers and consumers, and they can be positive and negative. A solution too this problem
must be improsed by a unit of government. It can either require paper wrapping through regulation,
encourage the manufactureto use paper by granting inducements, or punish the producer with q higher
tax on plastic wrapping material. Other examples of negative externalities include a noisy airport, a
building left to deteriorate, and smoking in a public place. Positive externalities are bit a less common,
but a good example is the resposible coorportion that a built a handsome headquarters building and
opened the adjacentgardens to the public; neightbors who invest in the appearance of their property;
and a very successfull for the nearby wine emporium.
The goal of public policy is often to add the price of externalities into the market price. Example might
include requiring those who produce negative externalities to compensate those harmed, taxing those
who are beneficiaries of positive externalities, taxing those who produce the negative externalities, and
rewarding those who produce positive externalities. The principles of marginal economics can be used
to decide on the correct amount of compensation to bring about the most efficient solution. In assessing
these charges, government forces those who produce negative effects on others to bear the cost, thus
using market forces to encourage producers to avoid these costs, sometimes in innovative ways taht
ring widespread social benefits.
Elasticity
The concept of elasticityis important to policy analysis, because government often consider the
provision of goods and service to individuals and spectaculate about what their response levels will be at
different prices. An example is the pricing of municipal water to encourage conservation while
attempting to maximize to return to the publicy-owned provider.additionally, governments are often on
the giving or receiving end of grants or subsidies intended to serve to introduce them engange in some
kind of activity. The price elasticity of demand for a good service is a measures of the kind of response
that can be expected from a costumer, given a change in price. Specifically it is the precentage change in
the quantity of a given item purchased, divided by the precentage change in price of the same item. For
most goods and services the prices elasticity is negative ; as the prices rises, the volume puchased goes
down. Economics textbooks often define price elasticity as the absolute value of the precentage change
in price. This always results in a positive value which makes it impossible to identify instances in which
price consumption changes are positively correlated. To avoid this confusion, we follow the approach of
brown and apgar and compute elasticity using data unaltered by an absolute value conversation.
Although the prices elasticity of demand for most good and service will be negative, the magnitude of
the change can vary. If the precentage change in price is greater than the precentage change in quantity
sold. Then the commodity is said to be price inelastic; where as if the precentage