Developing General Equilibrium Benefit Analyses for Social Programs: An Introduction and Example

Abstract

Benefit-Cost analyses of social programs often involve complex interactions between market and non-market goods. In this paper we outline one conceptual framework for incorporating the general equilibrium effects into benefit-cost analyses of changes in social programs. The goal is to develop models that are capable of capturing the interactions that take place between decisions involving marketed goods together with their effects on non-market goods and the reverse –changes in non-market goods that cause induce changes in decisions about marketed goods. These types of feedback effects are likely to result from large changes in social programs. These effects are compounded by the potential for endogenous realized outcomes that arise as a result of household actions taken in response to proposed policies. To demonstrate the importance of our conceptual discussion of these general equilibrium effects, we present an empirical example of our general equilibrium framework using teacher cuts in response to budget pressures in Maricopa County, Arizona. We find substantial differences in willingness to pay measures between models which account for endogenous education outcomes in a general equilibrium setting and those which ignore the linkages between market (housing) and non-market (education) goods in a partial equilibrium setting