What Is A Shadow Prices Or Accounting Prices?

In political jargon, a shadow cabinet is alternative cabinet in waiting and that which replaces the party in power when it collapses. In planning terminology, shadow prices are alternative prices of factors used by planners instead of market prices when these fail to deliver the goods.

Shadow prices quite interestingly may imply two opposite things, literally prices or imaginary prices or fabricated prices or unreal prices. In economic terminology however shadow prices are prices which should prevail in the open market in absence of any interference or manipulation and as a result of the interaction of the manipulation and as a result of the interaction of the forces of demand and supply.

In this strict sense, shadow prices can be termed real prices showing the true intrinsic value of goods and factors of production. In fact, both meanings carry a measure of validity. Shadow prices are fabricated imaginary or unreal prices in the sense that theses are not actual or market prices but improvised for specific task of project evaluation or cost benefit analysis of projects from the social standpoint. These can also be called real prices as these express the opportunity cost of goods and the factors of production. These are contrived and estimated to find out true worth of factors of production or their intrinsic values in contrast to values attached to them in imperfect markets.

A shadow price is the money value of a unit of a particular externality. They are calculated by economists because externalities are not formally brought and sold in markets, therefore market prices do not exist.
They are usually calculated when conducting cost benefit analysis of an investment.
The two main ways to measure shadow prices are: Hedonic pricing and revealed preference.