Shadow Pricing

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Shadow pricing

A practice employed by some economists that involves putting a price on things that normally do not have a market value. For example, pollution degrades common property and the natural heritage of present and future generations , but because it is considered a "free" good, no one "pays" for it at the marketplace. Yet pollution has a cost even if the market fails to explicitly take into account this cost and assign it to responsible parties. Thus pollution is perceived by most economists as a defect that undermines otherwise efficient markets. To correct this defect, economists often advocate the use of some type of shadow pricing for pollution. Such prices are set by the "shadow" procedure of asking people what they would be willing to pay for breathing clean air, watching whales migrate, or preventing the extinction of a particular species of plant or animal. Hypothetical or shadow prices for these "commodities" can thereby be estimated. Some environmentalists and economists, however, criticize shadow pricing for falsely attempting to assign a monetary value to things that are invaluable precisely because they (like beauty, love, and respect) are not and cannot be bought, sold, or traded in markets. To assign a shadow price, these critics claim, is to make the mistake of assuming that nothing has intrinsic value and that the worth of everything can be measured and reduced to its utilitarian or instrumental value.

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