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.

Collins Dictionary of Business, 3rd ed. © 2002, 2005 C Pass, B Lowes, A Pendleton, L Chadwick, D O’Reilly and M Afferson

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.

Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005
References in periodicals archive ?
The optimal marginal-cost pricing for the purchase and sale of EDPs is based on a set of shadow prices (Willett et al.
Thirdly, the use of domestic instead of foreign currency as the numeraire, provided that the "currency" is accounting rupees and not market rupees, does not mean that domestic market-price relationships are used; the shadow price relationships must be determined in either event.
Keywords: Data Envelopment Analysis (DEA), Shadow Prices, Capacity Utilization (CU), Public District Hospitals (PDHs), Tunisia
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.
The crops papaya and Tahiti lime, and the constraints AREAMAX11 and AREAMAX12 had positive shadow prices, which indicates that, if the maximum planting areas increase, the economic return will also increase.
Shadow prices are endogenously determined at the household level and, hence depend on household characteristics and household specific indicators of market participation.
The "distance-function" approach, as opposed to a conventional production function one, was favoured because: 1) it allows modelling the joint production of multiple outputs; 2) aggregation of outputs or inputs are not required for deriving shadow price; 3) no assumptions of production process behaviour such as cost-minimization or profit-maximization have to be made for deriving shadow prices, and; 4) it allows for shadow price derivation based on the Shephard (1970) duality theory (Fare et al.
With shadow prices you are trying to work out how much better off you would be as a result of having one more unit of a particular scarce resource (materials or labour, for example).
In some situations, specifying the shadow prices for such money values may be available in more detail.
The main objective of the current study is to compare the profitability, land use pattern and shadow prices of resources in conventional and organic farming systems.