74 MULTIPLE PURPOSE RIVER DEVELOPMENT 



plains, warning systems, and flood insurance — which would pro- 

 vide equally effective protection at lower aggregate cost. 



Evaluation of benefits provided by a project involving direct 

 interdependence with other fiscally independent production units 

 requires crediting the value of external economies and debiting 

 the cost of external diseconomies^* from the estimate of project 

 benefits otherwise taken into account. The value attributed to 

 pollution abatement, salinity repulsion, increases in power genera- 

 tion, etc., resulting from stream regulation from a storage reservoir, 

 can be taken as the sum which beneficiaries would be willing to 

 pay to obtain the service if permitted a market choice. Again, of 

 course, this could not exceed the lowest cost by which alternative, 

 equivalent services could be obtained. Similarly, the debits from 

 benefits otherwise estimated, that are required by the presence of 

 external diseconomies, must reflect adequately the costs which are 

 incidentally inflicted on third parties. 



If the development of a multiple purpose project increases the 

 supply of a marketable project service sufficiently to influence the 

 price at which the total can be marketed, the drop in price calls 

 for special treatment in estimating the value of the project output. 

 The aggregate value of the increment in supply is represented by 

 the amount which could be collected if each unit of the block of 

 new output could be offered separately for sale at the price it could 

 command. In short, successive units of output, during a specified 

 marketing period, would command prices below the level of pre- 

 ceding units in the sequence. Accordingly, neither the price which 

 would prevail in the absence of the project, nor the price which 

 would be necessary to clear the last unit from the market, would 

 directly indicate the value of each unit of output. If the demand 

 function for the service were linear, however, the value of the total 

 increase in supply could be approximated by using an average price 

 midway between the price which would prevail with the project 

 supply and without it.^^ 



Similarly, if investment in a project occurred in a relatively 

 underdeveloped region, where complementary facilities operated 

 below capacity or within the range of decreasing average costs, 



^* This assumes that third parties cannot be compensated directly for costs 

 that are incidentally inflicted. 



"See McKean, op. cit.. Chapter 10, for a complete discussion of this question. 



