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CS Professional · Strategic Management and Corporate Finance · Project Evaluation

In social cost benefit analysis (SCBA) of a project, what is the purpose of using shadow prices in place of market prices for some inputs and outputs?

Shadow prices are used in social cost benefit analysis to reflect the real opportunity cost or social worth of resources when market prices are distorted by controls, taxes, subsidies or market imperfections, giving a truer measure of a project's value to society.

  1. ATo reflect the true opportunity cost or social value of resources where market prices are distorted by controls, taxes or imperfectionsCorrect
  2. BTo reduce the tax payable by the project sponsor
  3. CTo increase the reported accounting profit of the project
  4. DTo comply with the lender's covenant on interest rates

Explanation

Market prices may be distorted by subsidies, controls, taxes or monopoly, so SCBA adjusts them to shadow prices that capture the real economic cost or value to society. The aim is social valuation, not tax or profit manipulation.

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