shadow price


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shadow price

the imputed PRICE or value of a good or service where such a price or value cannot be determined accurately owing to the absence of a market for the good or service, or to gross distortions in any markets which exist. To impute a price or value is to make the best estimate possible of what that price or value would be if a normal market existed.

One use of shadow pricing is when intra-firm trading occurs. The inputs of company division B may be the outputs of company division A. The products in which the two company divisions trade may not have an equivalent market price because no open market for them exists (for example intermediate components or managerial services). The transactions are given shadow prices, usually based on estimated costs plus a return on the capital involved.

A particular application of shadow pricing can be found in LINEAR PROGRAMMING where the solution to a problem yields hypothetical prices for scarce factor inputs, showing how much additional profit would result from an extra unit of each fully used resource. See TRANSFER PRICE.

shadow price

the imputed PRICE or VALUE of a good or service where such a price or value cannot be accurately determined because of the absence of an ordinary price-determined MARKET or because of gross distortions in any markets that do exist. To impute a price or value is to make the best estimate possible of what that price or value would be if a normal market existed.

WELFARE ECONOMICS attempts to equate the price of a product to its marginal social cost. The marginal social cost of a product is the summation of all costs associated with it. For instance, the true cost of electricity is not just the capital, labour and inputs of raw material; it includes the additional cost of disposing adequately of the waste products, such as smoke and dirt, and even the decrease in aesthetic appeal of the area in which the power station is situated. No values are given for these costs because no markets exist to price them. Shadow prices for such items are frequency estimated in COST-BENEFIT ANALYSIS.

A different use of shadow pricing is when intra-firm trading occurs. The inputs of company division B may be the outputs of company division A. The products in which the two company divisions trade may not have an equivalent market price because no open market for them exists (for example, intermediate components or managerial services). The transactions are given shadow prices, usually based on estimated costs plus a return on the capital involved. Such an estimate of market prices is used frequently in CENTRALLY PLANNED ECONOMIES (see TRANSFER PRICE).

A particular application of shadow pricing can be found in LINEAR PROGRAMMING where the solution to a problem yields hypothetical prices for scarce factor inputs, showing how much additional profit would result from an extra unit of each fully used resource.

References in periodicals archive ?
The dual DEA program is derived with shadow price constraints estimating the distance function [D.
In this paper, we use DEA technology to calculate the energy shadow price to reflect the scarcity of energy and environmental costs, thus improving the existing energy relative price system.
Since the annual volume proved to be a scarce resource, a shadow price is associated to it (opportunity cost of using a certain water volume), which corresponds to the expected reduction in the value of the objective function if this volume becomes more restrictive in one unity.
The shadow prices of land owners and farm tenants are contained in Table 3.
77); (16) the shadow price of homicides ($348,000, $83,700); the shadow price of assaults ($2,500, $975); the homicide rate (1.
The shadow price of capital K(t), [mu](t), has the behavioral function given by
It is clear from the contaminant shadow price data (Table 3) that the shadow price (in ZAR/kg) of phosphorus (P) is consistently highest for all plants, followed by nitrogen (N), suspended solids (SS) and organics (COD) the lowest.
delta](j) is the firm's shadow price for biomass; [delta](j) = [delta]V/[delta]x > 0.
The shadow price of labour is therefore [pounds sterling]20 (the maximum extra amount per hour that it may be worth paying for extra labour hours).
As recorded in the first row of Table 4, the bounds on the shadow price for manpower are obtained from salary (including bonus) information in 2006, which ranges from $0.
Google says it will place a priority on renewable sources of electricity for its data centres and employs a carbon shadow price when buying electricity to discriminate against coal and encourage the purchase of cleaner energy.
Labor cost: fixed salary of farm workers, seasonal and part-time workers wages, family members work calculated as shadow price.