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Project Evaluation, Shadow Prices, and Trade Policy

Ronald Findlay and Stanislaw Wellisz
Journal of Political Economy
Vol. 84, No. 3 (Jun., 1976), pp. 543-552
Stable URL: http://www.jstor.org/stable/1829868
Page Count: 10
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Project Evaluation, Shadow Prices, and Trade Policy
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Abstract

The problem of how to determine the appropriate shadow prices of primary inputs for the evaluation of new projects in an open economy subject to distortions is discussed. These shadow prices are compared with the corresponding free-trade and actual market prices. It is shown that if the distortion is an output subsidy or tax on existing production, the optimal intervention for new projects is subsidies and taxes on primary factors equal to the difference between the shadow prices and the market prices and not an output subsidy or single shadow exchange rate to provide offsetting protection for the new project. It is also shown that projects viable under free trade may reduce welfare if they are introduced into a distorted economy, while projects that would increase welfare in these circumstances might not be viable under free trade.

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