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Shadow prices for project selection in the presence of distortions : effective rates of protection and domestic resource costs (English)

The derivation of shadow prices for use in project evaluation when the existing allocation is characterized by ad valorem trade distortions is described. A simple mode of trade, with primary factors producing traded goods and with no intermediates and with fixed international prices for the traded goods, explores the case of trade distortion. This distortion entails a tariff or trade subsidy. The results on the appropriate shadow prices in project evaluation are related to two measures, which have been proposed as project evaluation criteria. Effective rate of protection is an inappropriate measure for project evaluation; and domestic resource costs, if they must yield the correct social evaluation of a project, must use the second best shadow prices derived from the trade model. Shadow prices are also considered in relation to three distortions: polar types of factor market imperfections, trade subsidies, and trade tariffs. Implicit in the analysis is the assumption that problems of income distribution and savings can be handled through the use of appropriate nondistortionary instruments. If this is not possible, the shadow prices require recalculation by introducing constraints that reflect the feasible set of public policy instruments. 41 references.

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Citation

SRINIVASAN, T. BHAGWATI, J.

Shadow prices for project selection in the presence of distortions : effective rates of protection and domestic resource costs (English). World Bank reprint series ; no. REP 57 Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/231311467987851935/Shadow-prices-for-project-selection-in-the-presence-of-distortions-effective-rates-of-protection-and-domestic-resource-costs