- Compensation policies.
- Economic growth centers.
- Prioritization of projects and prioritization of objectives in a given project must be
based on the principles of consumer sovereignty.
Shadow Price
(Also known as Accounting Price or Social Price)
(Definition from the Book ‘Pocket Economist’ by Prof. Matthew Bishop)
1.1 Shadow price is the true economic price of an activity: the Opportunity
Cost. Shadow Price can be calculated for those goods and services that do
not have market price, perhaps because they are set by government.
Shadow pricing is often used in Cost Benefit Analysis, where the whole
purpose of the analysis is to capture all the variables involved in the
decision, not merely those for which market prices exist.1.2 Speaking in simple terms, every input, activity and output is measured in
terms of price. In commercial projects market-price is used as the
yardstick to measure inputs and outputs. But in case of social projects this
is not possible. Opportunity cost may also be taken as shadow price. The
unit cost are determined on the basis of the inputs of a project. The
subsidies allowed, if any, are to be ignored, while calculating the unit cost.
The unit cost is also taken as base to measure the unit of goods or services
provided to a customer, again by ignoring the subsidies. This means that
subsidies, if any, at cost point or at providing point have to be eliminated
to calculate shadow price.- External Effects:-
2.1 The externality effect exists when a:- Production affects another production
- Consumption affects another consumption
- Production affects another consumption
- Consumption affects another consumption
2.2 The effect of each of these may be either negative or positive. If the effect
is negative, the sufferer has to be compensated. If it is positive, the person
who has gained must pay for it. The effects are analyzed from the point of
view of (i) input-generated effects and (ii) output-generated effects.