POLICY REFORM, SHADOW PRICES, AND MARKET PRICES

How should public projects and policy reforms be assessed when market prices give misleading signals? Revenues and costs at market prices then give distorted measures of social gains and losses and our appraisal should use social opportunity costs or 'shadow prices'. We show how shadow prices may be integrated into an analysis of policy reform, demonstrate the critical dependence of these prices on government policy and analyse their relations with market prices. The model allows for a wide range of sources of impairment of price signals. We also discuss key issues in the analysis of price reform and 'privatisation'. © 1990.