Theme 2 (Shadow Prices)

Question 1

What challenges exist in determining shadow prices for resources like land, water, and electricity?

Answer 1

These resources have diverse uses, making it difficult to assign a single value, and their valuation must consider externalities and specific contexts of use.

Question 2

What methods are used for non-market valuation of externalities?

Answer 2

Methods include direct market valuation, factor income, avoided cost, replacement cost, travel cost, hedonic pricing, and contingent valuation.

Question 3

Give an example of how shadow prices for water might be calculated.

Answer 3

Shadow prices for water might be calculated using the production function approach, where water is reallocated from lower to higher marginal value uses.