Elgar original reference
Edited by John Weiss and David Potts
David Potts and John Weiss UNDERLYING THEORY Project cost–benefit analysis (CBA) in the context of developing countries has its practical roots in the work on water resource planning in the US in the 1930s and its theoretical foundation in the new welfare economics of the 1940s (Little, 1950).1 The key feature is the insight that in any economy ‘social value’ in the sense of the contribution of any item to social welfare need not be represented by an observable market price – either because real world features of markets depart from competitive optima or because a market does not exist for the item concerned. In this framework holding everything else constant, the social value (P) for item i becomes: Pi 5 dW/dQi (1.1) where W is a measure of welfare, Q is output quantity and d denotes a small change. Social values in this sense have been variously termed shadow prices, economic prices or accounting prices to reflect their unobservable nature. In this chapter we use the term ‘shadow prices’ although other chapters in the book sometimes use the other terms. Social welfare itself needs defining. From its origins in welfare economics most project economic analysis takes as its starting point the individualistic social welfare function where total social welfare is the aggregation of individual preferences. Thus where consumers have access to more goods, their willingness to pay to obtain them defines social value.2 Two exceptions to this rule have been incorporated into the literature although they are rarely...