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	Table of Contents
p. 17 of 74 BACK | NEXT I. Introduction II. Background III. The Economic Rationale of A Project IV. Macroeconomic and Sectoral Context V. An Integrated Approach To Economic Analysis VI. Identification and Quantification of Costs and Benefits VII. Valuation of Economic Costs and Benefits A. General Considerations B. Role of World Prices C. Economic Prices of Traded Goods and Services D. Economic Prices of Nontraded Goods and Services E. The Economic Price of Labor F. The Economic Price of Land G. Bringing Economic Prices To A Common Base H. Conversion Factors I. Economic Viability: A Procedure VIII. Large Projects, Linkages, and National Affordability IX. Least-Cost and Cost-Effective Analysis X. Investment Criteria: Economic Viability XI. Discount Rate XII. Uncertainty: Sensitivity and Risk Analysis XIII. Sustainability of Project Effects XIV. Distribution of Project Effects XV. Projects and Policies XVI. Appendices XVII. Others

Guidelines for the Economic Analysis of Projects : VII. Valuation of Economic Costs and Benefits

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D. Economic Prices of Nontraded Goods and Services

69. The Bank is increasing its lending in areas where the project outputs are nontraded. The steps involved in estimating the economic value of nontraded output and inputs are summarized at the end of Appendix 11. While public utility, social sector, and environmental projects produce effects that are nontraded, many directly productive projects also have nontraded effects. Some will be marketed, such as port services or urban water and sanitation supplies.

70. Goods and services may be nontraded for different reasons. By their nature, some goods and services, such as domestic transport and construction, are products that must be produced and sold within the domestic economy. Sometimes goods and services are nontraded because of government policy decisions that they should not be exported or imported. Finally, some goods and services may be nontraded because their cost and quality are such that, although they can be sold in the domestic market, there is no international market. In some cases, nontraded inputs and outputs have close substitutes that are traded. For example, domestic firewood can be converted into the calorific equivalent of kerosene or gas. In these cases, the equivalent in traded products can be used to provide an economic price for the nontraded products. However, in most cases of nontraded products there will be no close substitute that is traded.

71. Nontraded goods and services used as project inputs, where additional project demands result in increased supply, can be valued in terms of their supply price, the marginal economic costs of extra supply. The marginal cost will differ between situations where spare capacity already exists and only variable operating costs will increase, and situations where there is no existing spare capacity, and the marginal cost will include a capital element as well. In either case, the traded component of the marginal cost structure can be valued at border prices, and the economic value of any remaining nontraded element in the marginal cost structure can be approximated by use of a group or standard conversion factor (see Section H below). Use of the marginal cost of supply converted to its economic value will fully account for the differences between domestic market and world prices.

72. It is not relevant to estimate a marginal cost of production for nontraded inputs in fixed supply. The demand price must be applied. Here the valuation of the input must rely on the willingness to pay principle: an estimate should be made of the price that different users are willing to pay for receiving or retaining input supplies. This will provide a value for the nontraded input in fixed supply.

73. Extra demand by a project for nontraded inputs, such as transport, construction, water, and power, may have both an incremental effect, where additional supplies are provided, and a nonincremental effect, where supplies are competed away from existing users. The economic price of the nontraded input will be the weighted average of the marginal supply cost and the demand price.

74. Most nontraded outputs will be incremental; they will provide additional supplies of a nontraded good. Incremental nontraded outputs should be valued at their demand price, that is at the average of their value to the new consumers with and without the project. The value to consumers is inclusive of any indirect tax on the output and net of any subsidy. Nonincremental nontraded output should be valued at its supply price, that is, taking into account the cost of supply of the alternative output being displaced.

75. Because nontraded outputs and nontraded inputs are, by definition, produced and used in the domestic economy, the effects on the domestic markets of extra output and extra demand may be significant. In each case, the effect on the price of the nontraded good and the responsiveness of demand to price changes need to be considered.

76. Where an increase in transport services, or a road improvement scheme, brings about a reduction in transport charges, in addition to the value of the output with the project, there will be a benefit to existing users of transport services given by the without-project demand times the price reduction. Most of this benefit will be offset by a decline in producer surplus. The net effect is equal to the nonincremental output valued through the average supply price. There will also be additional benefits to new users. The value is generally approximated by the average of the price with and without the project, times the change in demand. However, to estimate both effects, an estimate is required of the effects of the project on total supplies, and on the price of the nontraded good. Reaching an estimate of the without- and with-project quantities and the price is the key step in evaluating project effects. The corresponding financial prices need to be converted to their equivalent economic values for economic analysis.

77. In many instances, the supply of nontraded output will be monopolized in public or private hands. An increase in supply may not be associated with a decrease in price. In this case, benefits will accrue to new, but not to existing, users. Similar modifications can be made for valuing nontraded inputs and outputs in differing circumstances (see Appendix 11).

78. Many Bank projects produce nontraded outputs that are also nonmarketed; these are generally public goods. Public goods can be defined in terms of excludability and subtractability, as in paragraph 11 above. Public goods, such as uncongested roads, have low subtractability and low excludability. The marginal cost of using them is generally close to zero. However, public goods usually provide considerable economic benefits.

79. Nonmarketed outputs can be valued through direct willingness to pay measures, such as contingent valuation, travel cost, or other surrogate market techniques. More frequently, public goods are valued in terms of the changes they cause in the value of closely related private goods, or in the productivity of private sector activities. The public good is treated as an intermediate good in the production of a final private good. The value of the "intermediate" public good is then derived from the value of the private good it ultimately produces. This is particularly relevant when valuing infrastructure services, such as roads and bridges, and social services, such as education and health, which can have a measurable effect on private sector productivity.

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