What Is a Shadow Market?

The shadow price is also known as the optimal planned price or calculated price. It refers to the price determined based on certain principles, which can reflect the true economic value of inputs and outputs, reflect the state of market supply and demand, reflect the scarcity of resources, and allow resources to be reasonably allocated. The shadow price reflects the scarcity of resources and the demand for final products in a certain optimal state of the social economy, which is conducive to the optimal allocation of resources. ^[1]

The concept of shadow price was from the late 1930s to the early 1940s by one of the creators of mathematical and economics in the Netherlands, Jen Tingbergen, and a former Soviet mathematician, economist, and a Nobel prize winner Cantorovich proposed separately. It originally came from solving a linear programming problem that maximized the objective. When each unit of a certain resource is added, the target is increased by a certain unit, and different resources have different marginal contributions. The marginal contribution of such resources is defined as the shadow price of the resource.

Shadow price refers to the price that can reflect the consumption of social labor, the scarcity of resources, and the demand for final products when the social economy is in an optimal state. It can be seen that the shadow price is an artificially determined price that is more reasonable than the exchange price. The "reasonable" sign mentioned here can better reflect the value of the product in terms of pricing principles. Reflecting the market supply and demand situation, reflecting the scarcity of resources; from the perspective of the effect of price output, the resource allocation can be developed in the direction of optimization.

The shadow price is reflected in the project's output as a consumer's "willingness to pay" or "willingness to pay". Only when supply and demand are perfectly balanced will market prices represent willingness to pay. The shadow price is reflected in the input of the project is that resources do not invest in the project, and the benefits that can be brought by investing in other economic activities, that is, the investment of the project is at the cost of giving up the originally available benefits. Western economists call it "opportunity cost." After determining the shadow price based on the "willingness to pay" or "opportunity cost" principles. It is possible to measure the cost that the proposed project requires the economy as a whole and the benefits it provides the economy as a whole. Thus, the amount of increase in national income or net income that the investment in the proposed project can really bring to society is obtained. ^[2]

The calculation methods of shadow price mainly include linear dual solution method , market equilibrium price method ,

Shadow price of foreign trade goods

Foreign trade goods refer to the goods whose production and use will directly or indirectly affect the country's imports or exports, including goods that are directly exported, indirectly exported and substitute imports in the project output; goods. The shadow price of foreign trade goods is based on the actual port price that may occur, multiplied by

The shadow price has the following characteristics:

(1) The size of the shadow price objectively reflects the scarcity of resources in the system. According to the conditions of the complementary relaxation theorem, if a certain resource exceeds the supply in the system (that is, there is a surplus). Its shadow price (ie, dual solution) is zero. This fact indicates that increasing the supply of this resource will not cause any change in the system's daily standard. If a resource is a scarce resource (that is, the relaxation variable of the corresponding constraint is zero), its shadow price must be greater than zero (the number of tests for non-base variables is non-zero). The higher the shadow price, the more scarce the resources are in the system.

(2) Shadow price is a marginal value. Similar to the concept of marginal cost in economics, so shadow price has important application value in economic management:

(3) Shadow price is an optimal valuation of system resources. This value can only be given to the resource when the system is optimal. Therefore, some people call it the optimal price.

(4) The value of the shadow price is related to the state of the system. Any changes in the amount of resources, technical coefficients, and prices within the system will cause changes in shadow prices. So it is another kind of dynamic price. ^[4]