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 ?
Material balance method and shadow price method were used in this study to evaluate environment pollution cost.
As per the theoretical framework of Inclusive Wealth, whereby the amount of various capital in the Inclusive Wealth Index is derived by multiplying the shadow price by the amount of capital, the amount of each type of social capital was calculated by the triple product of the average amount each individual would be willing to pay, the number of households and the volume of capital existing in the town.
This implies that there is a surplus of EDPs in the permit market and the shadow price [[psi].sup.t] is zero.
It simply underscores that the analyst should not mindlessly use the present world market price as the shadow price over the entire life of the project; instead, he should predict any future changes in the real price of the good relative to other goods.
He covers models on finite probability spaces, utility maximization under transaction costs: the case of finite omega, growth-optimal portfolio in the Black-Scholes model, general duality theory, local duality theory, portfolio optimization under transaction costs, shadow price process, and a case study of fractional Brownian motion.
To estimate individual PDH CU, we formulate a dual DEA model including additional constraints on input and output shadow prices. Shadow price restrictions enrich the empirical CU measure by adding priorities in terms of input and output costs which have a significant economic meaning.
Marklund (2007) found that the shadow price mechanism to reduce carbon dioxide marginal abatement cost, through the economic loss computation reduction pay, on the use of policies and measures to reduce carbon dioxide emissions and achieve energy saving and emission reduction.
It states that the shadow price of the resource at time T must equal the marginal contribution of the resource to the salvage value, i.e., [[partial derivative][pi].sub.i]/[[partial derivative]S.sub.iT][partial derivative].
Even if the shadow price does not change, that is, [DELTA][P.sub.x] = 0, the CV depends only on the sales changes, [DELTA]X + [DELTA]Y.
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.
By implication, therefore, the higher the shadow price of an excluded activity, the lower is its chance of being included in the final plan.
where r is the discount rate (exogenous), the co-state variable [mu](t) is the current shadow price (in terms of G units) of the state variable K(t), and the l(t) is the current (in G units) marginal opportunity cost of managerial resources.