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Unit 8: Social Cost Benefit Analysis

3. So, shadow prices need to be developed and economic benefit need to be measured in Notes
terms of these prices.

8.2.1 Shadow Pricing

Choice of Numéraire

The unit of account in which the value of inputs or outputs is expressed:
1. What unit of currency (domestic or foreign)?

2. Current values or constant values.
3. With reference to which point – present or future.
4. In terms of consumption or investment.
5. With reference to which group.
UNIDO Numéraire: “net present consumption in the hands of people at the base level of
consumption in the private sector in terms of constant price in domestic accounting unit.”

8.2.2 Concept of Tradability

For tradable goods, the international price is a measure of its opportunity cost to the country:
1. Substitute import for domestic production and vice versa

2. Substitute export for domestic consumption and vice versa
Hence, the international price, also referred to as the border price, represent the ‘real’ value of
the good in terms of economic efficiency.

!
Caution So, shadow prices need to be developed and economic benefit need to be measured
in terms of these prices.
8.2.3 Sources of Shadow Prices

UNIDO approach suggests three sources of shadow pricing:
1. Increase or decrease the total consumption in the economy.
2. Decrease or increase production in the economy.
3. Increase or decrease export or import.

UNIDO approach is one of the methods of calculating Social Cost Benefit Analysis (SCBA). In
fact very popular. Normally we calculate financial benefits from a project while evaluating it,
but this method calculates economic benefits from the project. Although earlier it was commonly
used by government organizations but now it is being used by private players also. In this
analysis the monetary priced are replaced by shadow prices. Shadow prices are prices at perfect
market conditions, also called as economic prices. Thus the market prices are replaced by the
Economic prices and then the benefit or returns are calculated .in addition to this, adjustment is
made for Externalities (+ve like road facility, hospital facility etc. or –ve externalities like
pollution), savings (a rupee saved is valued more than a rupee consumed), redistribution of
income (a rupee distributed to poor is valued more than a rupee distributed to rich), taxes are

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