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Unformatted text preview: Shadow Prices When conducting a CBA analysts must determine the social opportunity cost of the project's inputs the social value of the project's outputs If the input (output) is traded in existing markets, analysts may use market prices to estimate of social opportunity cost (the social value) of the project's input (output) This approach is ne (ie, price re ects social cost/value) if the following two conditions are satis ed 1. if the input/output is traded in a perfectly competitive market; and 2. the project does not cause the market price of the input/output to change However, if either of above two conditions is not satis ed, the market price will not re ect social cost/value and the analyst must adjust observed prices before using them in CBA The process of adjusting observed prices to accurately re ect social cost/value is called shadow pricing and the adjusted prices are called shadow prices A shadow price is an estimate in dollars of either the social value of providing an additional unit of a good...
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This note was uploaded on 07/09/2011 for the course ECON 370 taught by Professor Clive during the Summer '10 term at UBC.
- Summer '10
- Opportunity Cost