Social Cost-Benefit Analysis for Development

A shadow price is the value of a good, service, or resource to society — its true opportunity cost or marginal social benefit — as opposed to its distorted market price. In developing economies, tariffs, taxes, subsidies, monopoly, unemployment, and over-valued exchange rates drive market prices away from social values. Social CBA replaces market prices with shadow prices (border prices for tradables, a shadow wage for labour, a shadow exchange rate for foreign currency) so that the appraisal reflects the project's real effect on national welfare rather than private profitability.

Both value inputs and outputs at shadow prices, but they choose different numeraires. The Little–Mirrlees (OECD) method uses world (border) prices as the unit of account and converts non-traded goods with a standard conversion factor, emphasising uncommitted government income measured in foreign exchange. The UNIDO method uses aggregate domestic consumption as the numeraire. The two frameworks are theoretically equivalent — they yield the same ranking of projects — and differ mainly in presentation and the practical route to estimating conversion factors.

The social discount rate converts future costs and benefits into present values, reflecting society's time preference and the opportunity cost of capital. It can be derived from the social rate of time preference (via the Ramsey formula combining pure time preference, growth, and inequality aversion) or from the marginal productivity of capital. It matters enormously because projects with long-deferred benefits — environmental, infrastructure, climate — are highly sensitive to the rate: a higher rate suppresses distant benefits and can flip the ENPV verdict, which is why guidance requires the chosen rate to be justified and stress-tested.