The Role of Price Elasticities of Demand in the Economic Impact of a Port

The standard approach to estimating the economic impact of a port overestimates the port’s direct impacts on exports and imports. The overestimates result because all export and import activity in the impact area is assumed to fall to zero in the absence of the port. We argue that this assumption is incorrect in general. How much exports and imports fall depends on the elasticity of demand for exports and imports. These elasticities may be infinitely large, which is what is implicitly assumed in the standard approach, but they may be less than infinity, in which case, not all of the export or import activity will be lost. We develop a methodology that explicitly accounts for the elasticity of demand for exports and imports and apply that methodology to the Port of Tampa. Comparing estimates of the direct impact using the standard methodology and ours confirms that substantial overestimates would have resulted from using the standard methodology.