What are Shadow Prices?
Marxist analysis accepts the value of commodities for the value
contained in them, and in the exchange between those who obtain
extraordinary profits and those who lose their profits as well as the
total distributed among the participants will be equal to the sum of
the labor socially incorporated into them. the same in its entirety.
If we accept this principle, a way to measure the individual value is
through the integral analysis of all the goods that are exchanged at
their market value including consumer and intermediate goods and in
their terms of trade when determining their prices in competition.
The value of each commodity generated in the market is determined by
the payment to the factors of production (labor and capital) imposed
on the government, profits of entrepreneurs, restitution to the
environment and replacement of assets.
Given that market prices are not a valid indicator of the social
value of goods or resources, due to the existence of market
imperfections, taxes, public goods or externalities, Shadow Prices
should be calculated instead. However, its estimation is unusual due
to the calculation difficulties involved. In the absence of
representativeness of market prices will be necessary to calculate
prices that work in perfect competition. The Shadow Price of a good
is defined as the price that said good would reach in a perfectly
competitive market.
It is accepted that shadow prices are implicit in the exchanges that
should be made to maximize a particular objective function (or to
minimize a cost function), also when we explore a series of combined
production possibilities (the maximum of Y for each quantity of X).
that occurs). The models of mathematical programming and matrix
algebra can help to calculate the shadow prices, of the goods in
perfect competition, respecting the principle of marginal analysis
that shows the irrecoverable social loss generated by the imperfect
markets. Unlike the market prices that are evaluated from the
investor's interest, the shadow prices are determined according to
the cost-benefit analysis of the company that allows determining the
convenience in the realization of plans and projects to the Nation.
These prices are also known as social prices.
The opening of internal markets to the world market impacts the
calculation of domestic prices in competition. It is expected that
the goods acquired in the international markets are representative of
the value of the goods in perfect competition, since upon being
marketed, the plaintiffs have greater selection options. The
establishment of prices of currencies generally below their real
value, controls on imports, taxes imposed on market operations of
goods that intervene in international trade and goods produced in the
country with internal inputs, generate strong distortions in the
market and away from domestic prices of the real value of goods and
services.
Goods that have the possibility of being imported or exported in
competitive markets, considering the indicated distortions, generate
less difficulty to identify their prices in perfect competition
(marginal cost = demand), however, those that are sold in the
domestic markets keep hidden your account prices. The
opportunities offered by international trade to a country are the
basis for calculating the economic value of both its domestic
production and the productive factors of the national economy. In a
market open to international competition, merchandise can be
negotiated under conditions of efficiency where the CIF values (cost
of the product plus insurance and freight costs to the port of
destination) and FOB (cost of the product in the port of origin
before paying) the insurance and freight charges to the port of
destination) become the competitive prices necessary for the adoption
of decisions concerning the national activity.
The Shadow Prices system must distinguish two types of prices, the
efficiency prices that are calculated on the basis that any
additional unit of consumption is as valuable as any additional unit
of investment and that the marginal utility of an additional unit of
consumption it does not vary with the income level of your receiver.
The second group is represented by social prices where the
consequences on the distribution of income implied by the use or
production of goods and services are incorporated. In a backward
economy, goods can be classified as fully commercialized, those that
are not commercialized, those that are partially commercialized that
combine characteristics of one or another group, and those
potentially commercialized that are protected by the government from
international competition.
The domestic market presents different pricing modalities: The basic
prices established at the point of production in which transactions
are valued excluding indirect taxes and marketing and transportation
costs. Producer Prices that include indirect taxes at producer level.
User Prices as a result of the valuation of the transactions at the
point of delivery that include indirect taxes and marketing and
transportation margins. Non-traded goods, whose efficiency price is
unknown, can be calculated through the marginal cost of production of
all the inputs valued at account prices necessary to produce it.
For the calculation procedure, double-input input-output matrices are
used, through the semi-input-output (SIO) method. With the
input-output analysis, the adjustment of market prices is made with
the interrelations between the different productive sectors. Market
prices depend on the prices of all the inputs that are used in the
production process and that at the same time will be outputs of the
rest of the sectors, and even of themselves, since they are related
to each other.
The empirical applications of the SIO method have been made in
backward economies financed by organizations interested in economic
development such as the Inter-American Development Bank (IDB),
concerned about the profitability of their investment projects. The
logic of the calculation model of the Shadow Price lies in the
assumption that the economic value of a good produced can be found by
adding the cost of all inputs, intermediate and primary, that have
been used to obtain it. In turn, the cost of intermediate inputs,
since they are the result of a previous production process, can also
be decomposed into intermediate and primary input costs. The
decomposition can be done as many times as necessary until, finally,
the production cost of a good is expressed only in terms of the
primary inputs used, both directly and indirectly.
Guillermo Souto
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