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	Table of Contents
p. 14 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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VII. Valuation of Economic Costs and Benefits

A. General Considerations

53. Once the costs and benefits of a project have been identified and quantified, they should be valued according to a common criteria. This allows them to be aggregated and compared. Decisions by producers and users of project output will be based on financial prices. However, to evaluate the consequences of their decisions for the national economy, costs and benefits need to be valued at economic prices that represent their value from the national economic perspective.

54. Costs and benefits should be valued in constant prices, that is, in terms of the price level prevailing in the year in which the project is appraised. Any expected change in the general price level can be ignored. However, if it is expected that there will be significant changes in relative prices over the life of the project, for example that the output of a food production project will decline in value relative to prices in general, then this relative price change must be incorporated in the valuation of the cost or benefit item (see Appendixes 7 and 8).

55. In an economic analysis, market prices are adjusted to account for the effects of government intervention and market structure. The result is shadow prices. For project outputs, the shadow price is based on the supply price, the demand price, or a weighted average of the two. Where project output is nonincremental, that is, where it substitutes for alternative forms of supply, then the shadow price is based on the supply price of these alternative forms of supplyon the market price, less any production taxes, plus any subsidies on the alternative supplies. This supply price in turn must be adjusted for the effects of government intervention and market structure on the inputs going into the alternative production. Where project output is incremental, that is, where the project provides additional output compared to the without project case, then the shadow price is based on the demand price for that outputon the market price inclusive of any consumption tax and exclusive of any subsidy falling on the buyer. This demand price also must be adjusted for the average difference between economic and market prices, as explained further below. In many cases, a project will produce a combination of nonincremental and incremental output. In such instances, the shadow price of the output is based on a weighted average of the supply and demand prices (see Appendix 9).

56. For small projects producing an import substitute good, the whole output will be nonincremental. It can be valued through its supply price, that is, through its import price. For small projects producing an export good, the whole output will be incremental. It can be valued through its demand, or export, price. For a project producing a combination of import substitute and export goods, the output can be valued through a weighted average of the import and export prices. This valuation process becomes more complicated when the project that produces traded goods is large and will have an impact on international prices. The impact must be considered when applying supply and demand prices.

57. The same principles of valuation apply to projects producing outputs that are nontraded. Generally, some of the nontraded output will be nonincremental. The shadow price is based on the supply price of the alternative supply being displaced. Also, some of the nontraded output will be incremental. The shadow price is based on the demand price or willingness to pay of the new users. The shadow price of total nontraded output will be based on a weighted average of the supply and demand prices.

58. In practice, it may be difficult to identify and separate the nonincremental from the incremental output of a project. This is particularly so for projects producing nontraded outputs that are quite large and may have an impact on demand and supply prices. The proportion of nonincremental to incremental output will depend on the elasticities of demand and supply. The data available, and interview structure needed to estimate the willingness to pay of new users, may not provide sufficient information to provide reliable estimates of relevant elasticities and, therefore, output proportions. In such circumstances, an estimate of the supply price for alternative supplies, that is, the cost of supply without the project, may be applied to the whole of the nontraded output, both nonincremental and incremental.

59. The shadow price of project inputs is also valued through a weighted average of their supply and demand prices. However, in the case of inputs, the valuation of nonincremental and incremental inputs is the reverse of the case for outputs. For nonincremental inputs, that is, for input supplies that are competed away from other uses, the shadow price is based on the adjusted demand price or willingness to pay for the input. For incremental inputs, that is, for nontraded inputs where production is expanded, or for traded inputs where additional supplies are imported or substitute for exports, the shadow price is based on the adjusted supply price of the input, that is, on the supply price of additional domestic production for a nontraded input, and on the import or export price for traded inputs. In the case of a nontraded input in fixed supply, or in the exceptional case of a very large increase in demand for a traded input that affects its price, the shadow price is based on with-project supply prices that may require relevant elasticity estimates to predict.

60. The basis for valuing incremental and nonincremental outputs and inputs is summarized in Table 1. The relevant supply or demand prices have to be adjusted for the effect of trade controls and market structures that create a difference between financial and economic values. Therefore, the shadow price of an output or input is the weighted average of its supply and demand prices adjusted for these additional factors.

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