Shadow Pricing

Shadow Pricing

In a cost-benefit analysis, the assignment of a dollar value to an intangible asset or liability that cannot be sold. Shadow pricing is arbitrary; that is, because these assets and liabilities cannot be sold, and analysts must make an educated guess on their value. An example of shadow pricing occurs in the cost-benefit analysis of building a factory. The analysis must calculate the cost of blight on the neighborhood in which the factory is built. Because there is no way to put a real value on the cost of blight, shadow pricing assigns an arbitrary value to it.
References in periodicals archive ?
Shadow pricing : A numeraire in real, present-value terms is generally sufficient for most commercial calculations.
However, the application of the shadow pricing criterion will take effect starting with the fiscal year ending December 31, 2016.
It stated : "Critically, this will reduce revenue leakage based on the product's ability to do shadow pricing on negotiated preferential pricing,"
There are some major issues involved in cost benefit analysis, of which the most important are valuation of costs and benefits, shadow pricing, discounting, income distribution, the treatment of uncertainty and the measurement of externalities (e.g., environmental impact study).
The team will tap into existing databases and ecological models and explore the use of economic methods such as shadow pricing, contingent valuation and choice modelling.
It therefore follows that a financial firm that wants to maximise shareholder value cannot use the relatively straightforward capital pricing tools that are available to nonfinancial firms, and must seek an alternative shadow pricing tool to determine whether an investment adds to or detracts from shareholder value.
3 For an intuitive discussion of shadow pricing and project evaluation, see Tower (1991).
'Shadow pricing in distorted economies', American Economic Review, 69, 902-14.
The concepts of social opportunity costs and of sub-optimal savings rates, for example, were central to the form of economic analysis based on shadow pricing espoused by Little and Mirrlees in their 1968 OECD volume and by their followers.
To the contrary, it highlights the need for creating institutional mechanisms, from formal shadow pricing to informal interoffice negotiation, that can induce greater efficiency in the use of space resources allocated outside normal market channels.
(3)For fuller analysis, including the treatment of shadow pricing and other issues beyond the scope of the present paper, see Brent 1990; Little and Mirrlees 1969, 1974; UNIDO 1973; Lal 1974.
Any topic of further interest could be selected for in-depth study from Chapters 3 through 10, where welfare weights, competitive equilibrium, allocative and cost efficiencies, shadow pricing and a cost-benefit framework are discussed.