Proposed National Environmental Standard for On-site Wastewater Systems: Discussion Document

• Executive Summary
• 1 Introduction
• 2 Statement of the Issues
• 3 What are the Options?
• 4 Proposed National Environmental Standards for Telecommunications Facilities
• 5 Efficiency and Effectiveness of the National Environmental Standards
• 6 References
• Appendix 1: Proposed National Environmental Standards for Telecommunications Facilities
• Appendix 2: Final Form of National Environmental Standards as Agreed by Cabinet
• Appendix 3: Telecommunications Background
• Appendix 4: Theoretical Considerations
• Appendix 5: The Impact of Cellphone Towers on Property Values
• Appendix 6: Section 43 of the Resource Management Act 1991

Appendix 4: Theoretical Considerations

Cost-benefit analysis is a form of applied welfare analysis, the object of which is to assess how a proposed policy or investment changes the economic welfare of the affected community.  Welfare in this sense consists of the economic surpluses associated with the resultant activity, as illustrated in Figure 1.  The producer surplus is simply the difference between the market price for transactions in a service and costs incurred in providing that surplus.  The costs of supplying different units differ for a range of reasons, yet the market price is determined by the cost of supplying the marginal customer; so a lot of units of supply earn an economic rent.  This surplus is broadly consistent with operating surplus or profit of a company, so changes in profit can be indicative of changes in producer surplus.

The other component of economic welfare is consumer surplus, which is the difference between market price and what consumers would be willing to pay to obtain the service.  This arises because individual consumers have differing willingness to pay for the same service.  As suppliers are rarely able to perfectly discriminate between customers, the market price is determined by the marginal customer’s willingness to pay.  In short, many consumers obtain goods and services at a price less than they would be willing to pay, obtaining a surplus value which they can use to purchase other goods or services.

Source: NZIER

Consumer surplus is difficult to observe, and depends on estimating the shape and slope of the demand curve for the service, which itself is no easy task.  In considering the welfare effects of the telecommunications NES, therefore, the most tangible measures are likely to be for changes in the producer surplus.  There will be changes in consumer benefits over and above what can be observed in changes in the market, but their size and shape cannot be determined with any precision.

This imprecision is compounded in the case of the telecommunications NES because it offers the prospect of simultaneous changes in the quantity and quality of service offerings.  Roadside cabinets and aerials rarely provide an exact substitute for a current service: usually they improve an existing service, or provide a new service in an area with no previous service.  While the effects on economic surpluses are relatively straightforward if all that is happening is a reduction in the cost of a given service, changing the quality of service offering implies a higher-value offering and involves displacing lower-quality offerings as well.

The welfare effects of the telecommunications NES are illustrated in Figure 2, which assumes for simplicity a downward sloping demand curve and a horizontal supply curve, corresponding with the price line P0.  If the original service was offered at price P0 and generated business volume of Q1, an improvement in quality is likely to result in outward shift of the demand curve (D0 to D1).  But if it costs more to provide the enhanced quality so the price rises to P2, demand for the new service will settle at Q2.

Source: NZIER

The welfare effects are as follows:

• areas a, b and f comprised the original consumer surplus, but area b is captured by producers to contribute to their producer surplus or cost of supply

• areas e, c and g represent new consumer surplus associated with improved quality services

• areas d and h represent new revenues to suppliers that contribute to covering the cost of services.

Therefore, if (g+c+e) is greater than b, there is a net gain in consumer surplus.  As drawn, there is no change in producer surplus, as horizontal price/supply lines imply all revenue is absorbed by the cost of providing the service.  But if the supply curve slopes up (as is the case with most services) there will also be some gain in producer surplus.

In practice, there is rarely any empirical data on which to base an assessment of change in consumer surplus resulting from new services or improved quality, before they occur.  For this analysis, gains in consumer surplus are acknowledged but not quantified, and the focus is on how the NES changes producer surplus, both for industry and regulatory authorities.

 

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