5. Secondary Markets Reading: BGVW, Chapter 5 MOMA article

1. Primary vs. Secondary Markets Primary: direct effect Secondary: indirect effect Examples: public transit, dredging, fishing Other names for “secondary effects” second round spillover pecuniary indirect side

2. Theme All Impacts are typically fully measured as surplus changes in primary markets Exception distortions in secondary markets (externality, monopoly, taxes) May want to trace equity effects

3. Fishing Example No distortion/No price change in 2nd markets Fishing equipment is the secondary market

Think about what is in the demand curve for recreational fishing trips Tempting to treat increase in panel (b) as an increase in consumer surplus, but this is wrong. It would be double counting. All surplus is captured in cs in primary recreation demand mkt. Think about what is in the demand curve for recreational fishing trips Simple numerical example: Total wtp for a fishing trip is $100 travel cost to site is - $ 20 bait cost is - $ 5 Cons Surplus for fishing trip: $ 75

In this example. What is the individual’s maximum wtp for bait? Total wtp for fishing: $100 Cost of travel: - $ 20 Max wtp for bait: - $ 80 $ 0 Now consider the demand for (twtp) for bait and surplus in that market. Total wtp for bait: $ 80 Cost of bait: $ 5 $ 75 Demand (or wtp) for bait is a DERIVED from demand for fishing trip . Consumer surplus for bait, but this is derived from the primary mkt for fishing days! Double counting!

Comment: essential & nonessential What about expenditures on fishing equipment, the area ?

No distortion/Yes price change in 2nd mkt Boardman et al., Cost-Benefit Analysis, Prentice Hall, 2001. Golf is the secondary market

Again, tempting to add surplus changes in golf mkt, but must be careful. Again, think about what is in recreational fishing demand curve (good golf substitute, no or bad golf substitute) But rec fishing demand curve assumes price of golf is fixed and it is changing Three demand curves: D* is the observed or equilibrium demand curve. It is adjusting or accounting for the price changes. If you use this curve you will fully capture the effects of golfing price shifts in mkt! Note: area(abc) ~ area(efg)

Distortion in secondary market Fishing equipment is the secondary market, but lead sinkers cause external effect What if there was a tax on sinkers?

General Rule Multipliers Examples on page 128 Ignore surplus changes in undistorted secondary markets, but account for effects in distorted (externality, monopoly, tax) secondary markets. Multipliers Secondary markets, so ignore If standing is narrow enough or analyst really wants to trace impacts, OK. Be consistent Get both sides of transfers Yankee Stadium/Transfers Examples on page 128