K
KateSoren
Guest
Market prices at factor cost, in so far as there is perfect competition, actually reflects the true opportunity costs. In comparison, shadow prices are derived indirectly, and to some extent they are somewhat suspect. Should we, when aggregating, treat market and shadow prices equally? The difficulty becomes more real when shadow prices form a higher proportion of the total costs and attendant benefits.
Consider the example of a land allotted for a car park. Once this land has been converted as a car-parking area, the annual income increased to nearly 2 lakh rupees mainly through the parking fees collected from the users. The benefit gained by the new people using this facility was based on the estimated demand curve derived from the price paid by the existing car-parkers. Had this shadow price been overestimated by 30 percent, the scheme would not have been viable.
Almost all the leading Builders in India do in-depth market research and analysis before committing funds for mega real estate projects. The cost to benefit ratio is always kept at a particular level and the leading builders take much care to see that the costs do not override the attendant benefits. Due to the increasing volatility in the real estate market, a real estate investment is prone to wild fluctuations mainly due to the rise and fall of the prices of a host of parameters.
When there is a decreasing demand, the property values normally start decreasing. The apartment complex or commercial building may have been constructed at a very high cost, mainly due to the use of high quality building construction materials and the employment of highly skilled labor. But in the changed circumstances, when there are fewer takers for such properties, the value of the built up space will come down and the builder will be forced to sell it to redeem the investment causing much differences in the cost-benefit ratio.
Consider the example of a land allotted for a car park. Once this land has been converted as a car-parking area, the annual income increased to nearly 2 lakh rupees mainly through the parking fees collected from the users. The benefit gained by the new people using this facility was based on the estimated demand curve derived from the price paid by the existing car-parkers. Had this shadow price been overestimated by 30 percent, the scheme would not have been viable.
Almost all the leading Builders in India do in-depth market research and analysis before committing funds for mega real estate projects. The cost to benefit ratio is always kept at a particular level and the leading builders take much care to see that the costs do not override the attendant benefits. Due to the increasing volatility in the real estate market, a real estate investment is prone to wild fluctuations mainly due to the rise and fall of the prices of a host of parameters.
When there is a decreasing demand, the property values normally start decreasing. The apartment complex or commercial building may have been constructed at a very high cost, mainly due to the use of high quality building construction materials and the employment of highly skilled labor. But in the changed circumstances, when there are fewer takers for such properties, the value of the built up space will come down and the builder will be forced to sell it to redeem the investment causing much differences in the cost-benefit ratio.