ABSTRACT
This chapter moves from the abstract framework of Chapter 3 to a more applied setting. The chapter and revenues and social costs and benefits can be assessed through a financial and economic analysis respectively. Figure 4.1 describes the different steps for carrying out a project evaluation. The important relationship between financial performance, financial sustainability and economic performance is analyzed in section 4.1 by discussing and justifying the necessity to consider observed prices as a first step in the assessment of the economic value of a project. The chapter then illustrates the steps that have to be taken to move from financial performance results to economic performance estimates (section 4.2) and presents, in an empirical perspective, the approaches typically used to proxy shadow prices in real-world economies. An overview of the ideas and approaches for accounting price calculation and a taxonomy of the goods for which accounting prices are estimated (distinguishing between tradable and non-tradable, minor and major, inputs and outputs) are given in section 4.3, while further analysis is made in the following sections. In particular:
• section 4.4 deals with the Little-Mirrlees method of using border prices as proxies of shadow prices of traded and tradable goods;
• in section 4.5, two alternative methods for the valuation of minor non-traded and non-tradable goods are discussed, namely the standard conversion factor and the shadow exchange rate;
• section 4.6 explains the long-run marginal cost approach used for major nontradable project inputs;
• and finally, section 4.7 depicts other different empirical approaches to the estimation of shadow prices.
