Question

Question 5 Thanks to a new federal program that will provide 50% matching funds, Fun City has decided to build a new municipal water park with pools, water slides, and so forth. To build the water park, Fun City would have to purchase concrete from an essentially competitive market. As a result of this purchase, the price of concrete would increase slightly. Can the city's budgetary expenditure on concrete be appropriately used as the measure of the social value of the cost that would result from its purchase of concrete? Or is shadow-pricing necessary? Briefly explain. [In answering this question, demonstrate that you know what shadow pricing is and use a diagram to illustrate your discussion.]

Answer 1

Shadow prices reflect true values for factors and products for the calculation or estimations of prices in social cost benefit analysis.  Shadow prices are prices indicating rhe intrinsic or true value of a factor or product in the sense of equilibrium prices. These prices may be different for different time periods as well as geographically separate areas and various occupations ( in case of labor). They may deviate from market prices.

​​​Shadow pricing is basically necessary for the following reasons:

• Imperfect market mechanism
• Wage rates
• Capital costs
• Exchange rate
• Inflationary pressures

500, 2001 OJA To100200 400 500 800 700 BC

Yes, city's budgetary expenditure on concrete be appropriately used as the measure of the social value of the cost that would result from its purchase of concrete to a certain extent only.