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Shadow Prices for Project Evaluation Under Alternative Macroeconomic Specifications

Clive Bell^1,2; Shantayanan Devarajan^1,2

¹ Harvard University · ² TD Bank

This paper takes the view that a project is a disturbance to an economy in equilibrium, and examines the shadow prices for project evaluation under alternative assumptions about how equilibrium is restored. When the government reacts by altering its foreign exchange reserves—a nondistortionary adjustment mechanism—the shadow prices coincide with those advocated in the manuals on social cost-benefit analysis. However, if the government adjusts its domestic expenditures or tariff rates, the shadow prices will differ from those of the manuals, except insofar as the relative shadow prices of tradeables remain their relative border prices.

DOI

10.2307/1886021

Volume

98 (3)

Pages

457

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