Shadow Prices for Project Selection in the Presence of Distortions: Effective Rates of Protection and Domestic Resource Costs

The paper addresses the problem of deriving shadow prices for use in project evaluation when the existing allocation is characterized by ad valorem trade distortions. The analysis is used to clarify and resolve the long-standing debate among effective-rate-of-protection and domestic-resource-cost proponents as to the respective merits of their measures as methods of project evaluation. The derivation of shadow factor prices is then extended to three major factor market imperfections familiar from extensive trade-theoretic analysis.

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