Professional Documents
Culture Documents
Scba
Scba
Project Cost
Associated costs
Merit Wants
Goals and preferences not expressed in the market place, but
believed by policy makers to be in the larger interest, may be
referred to as merit wants.
UNIDO Approach
Two principle approach for SCBA:
- UNIDO Approach
- Little-Mirrlees Approach
UNIDO method involves five stages:
1. Calculation of financial profitability measured at market
prices
2. Obtaining the net benefit of the project measured in terms of
economic (efficiency) prices
3. Adjustment for the impact of the project on savings and
investment
4. Adjustment for the impact of the project on income
distribution
5. Adjustment for the impact of the project on merit goods and
demerit goods
Net benefit in terms of Economic (Efficiency) prices:
- Also referred to as shadow prices
- Market prices represent shadow prices only under conditions
of perfect markets
- So, shadow prices need to be developed and economic
benefit need to be measured in terms of these prices
Shadow Pricing
Choice of Numraire
the unit of account in which the value of inputs or outputs is
expressed
o What unit of currency (domestic or foreign)?
o Current values or constant values?
o With reference to which point present or future?
o In terms of consumption or investment?
o With reference to which group?
UNIDO Numraire: net present consumption in the hands of
people at the base level of consumption in the private sector in
terms of constant price in domestic accounting unit.
Concept of Tradability
For tradable goods, the international price is a measure of its
opportunity cost to the country
o Substitute import for domestic production and vice
versa
o Substitute export for domestic consumption and vice
versa
Hence, the international price, also referred to as the border price,
represent the real value of the good in terms of economic
efficiency.
Tax
Sources of Shadow Prices
UNIDO approach suggests three sources of shadow pricing:
i. Increase or decrease the total consumption in the economy
ii. Decrease or increase production in the economy
iii. Increase or decrease export or import
5
S`
D
E
P
S
D`
O
Quantity
DD = Demand Schedule
SS = Supply Schedule
OQ = Quantity Bought
OP = Price per unit
Total willingness
Price Paid
Consumer surplus
= ODEQ
= OPEQ
= DEP
Externalities
Characteristics:
It is not deliberately created by the project sponsor but is an
incidental outcome of legitimate economic activity
It is beyond the control of the persons who are affected by it, for
better or for worse
It is not traded in the market
Examples of beneficial external effects:
An oil company drilling in its own fields may generate useful
information about oil potential in the neighboring fields
The approach roads built by a company may improve the
transport system in that area
The training program of a firm may upgrade the skills of its
workers thereby enhancing their earning power.
Can be measured by indirect means:
What the neighboring oil fields would have spent to obtain the
information
The value of better transport may be estimated in terms of
increased activities and benefits derived from these.
Benefit from the training program may be estimated in terms of
the increased earning power of workers
Examples of harmful external effects:
A factory may cause environmental pollution and people living
adjacent to it may be exposed to health hazards
Airport in a certain area may raise noise level considerably in the
neighborhood
A highway may cut a farmers holding in two adversely affecting
his physical output.
Can be measured by indirect means:
Cost of pollution in terms of loss of earnings as a result of
damage to health and cost of time spent for coping
Cost of noise from difference in rent
Effect of highway on consumer willingness to pay for output
7
Project
Other private business
Government
Workers
Consumers
External Sector
b
wi =
ci
where, wi = weight attached to income at ci level
b = base level of income that has a weight of 1
n = elasticity of the marginal utility of income
8