What is the shadow price?

In economics, shadow prices assign monetary value to all parts of the production process, including intangible assets. The technique is used to analyze costs and benefits. It can help planners and managers understand how certain changes in business will affect the result. The shadow prices by definition include educated estimates in terms of the value of certain business assets and effects that are usually not sold on the market.

When managers try to optimize their business, they try to evaluate what effects would result from different changes. These changes could include hiring more workers, operating more hours a week or opening another office. Some of these changes may include relatively direct costs, such as an hourly wage that a new worker would have to be paid. On the other hand, other costs may be more difficult to estimate. They could include a lost time for qualified workers or environmental damage resulting from increased production.

Shadow prices include uPrice management on all aspects of production, even intangible. This task may prove to be extremely complicated, because many ways of production are not sold in the open market, which determines many business costs. For example, if other unskilled workers are considered to rent, it may be easy to determine the market rate for work. However, the cost of committing an experienced manager for assistance in opening a new factory may be much harder to calculate. There may be unpredictable events that will require the manager's attention in the future.

The cost of these intangible assets is sometimes called the cost of decision. The cost of the name is the cost of the opportunity, the costs of missed opportunities. A worker who is fully occupied on one project is unable to work on other projects. The cost of opportunity can also apply to the community in general. The cost of opening the factory in one place includes a missed opportunity to build anythingand others in the same place.

Governments use the shadow prices of the experiment and determine the complex costs of the project, including social or environmental costs. If the market price of the construction of the road is relatively low, but the environmental damage is relatively large, the project may not be justifiable. Likewise, if the road would result in an unacceptable noise near residential areas, the project could be eliminated. Shadow prices are therefore a quantitative evaluation of all hidden costs of the proposed economic decision.