SHADOW PRICING SIMPLIFIED: ESTIMATING ACCEPTABLY ACCURATE ECONOMIC RATES OF RETURN USING LIMITED DATA

Despite the huge literature on 'efficiency' shadow pricing and the general consensus on methods and choice of numeraire, this method is infrequently practiced. This may be a result of the apparent complexity of the methods, with their exacting data requirements. However, the basic nature of shadow pricing adjustments is easily understood, and their effects on the shadow|market price rations-CFs-are predictable. Using a world prices numeraire, the level of the CF for any cost or benefit item can be predicted if a few basic features of the market price are known, particularly the destination|source of the item (traded or non-traded) whether the price is free, or whether it includes any tax or subsidy element. CFs can be estimated in relation both to unity and the SCF that will allow a crude estimate to be made of whether an efficiency IRR is likely to be above or below an economic IRR based on constant market prices. For many productive projects, crude estimation based on knowledge of shadow pricing principles and market price composition will allow an economic analysis to be undertaken that is sufficient in many operational situations, quickly and without the need for painstaking data collection and tortuous calculation. © 1997 John Wiley & Sons, Ltd.