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A range of important non-tax distortions are examined in this chapter. They include externalities, non-competitive behaviour, and price-quantity controls that are important and are topical extensions to the basic analysis. Many non-tax distortions apply in labour markets, and since labour is a significant input to production, both private and public, these distortions have important welfare effects. This is demonstrated by deriving the shadow wage rate in the presence of minimum wage laws and other labour market interventions to identify their welfare effects. The analysis confirms that welfare effects from policy changes depend crucially on the type of market distortion. While equilibrium outcomes in the presence of non-tax distortions can be replicated by appropriately chosen taxes and/or subsidies, any welfare effects from policy changes in their presence can be quite different. For example, increasing the supply of a good that is subject to an effective price floor will not expand activity because it is demand-constrained, whereas activity will rise in the presence of a tax.

This chapter provides a set of questions drawn from material presented in previous chapters. Most are designed to emphasize important points, and to illustrate practical examples of applied welfare analysis. A number of questions are quite long and are intended as assignments, while others are more suitable for tutorial exercises.

This chapter is somewhat unrelated to the rest of the book, since it does not deal with taxation policies but with the calculation of the shadow cost of labour (shadow wage) in less developed countries (LDCs). During the last two decades, there has been growing consensus on the usefulness as well as the limitations of social cost–benefit analysis for project and expenditure evaluation in developing economies, and on the general procedures for determining shadow prices for such analyses. The objective here is to illustrate how the models and approaches developed in the rest of the book can be used for purposes other than taxation analysis, rather than to present a comprehensive shadow price model. The model presented addresses the case of an open economy facing fixed international prices, in which the government cannot (or does not) set different prices in the rural and urban sectors, and in which tariffs are fixed.