A shadow price is an estimated cost for a good or service that isn’t typically offered for sale or priced in the market. Businesses can have a better grasp of a project’s costs and benefits by using shadow pricing.
Shadow pricing, however, lacks the support of trustworthy data and is imprecise due to its reliance on subjective assumptions. It is frequently used in cost-benefit accounting to evaluate intangible assets, but it may also be used by economists to estimate the cost of externalities or to determine the true worth of a money market share. Economists typically utilize shadow pricing to estimate the cost of public infrastructure initiatives like parks and transit.
When referring to money market funds, the term “shadow pricing” describes the practice of calculating a security’s price based on its amortized costs rather than its given market value.
To provide investors with a more accurate picture of the fund’s performance, certain funds are required by law to reveal the actual NAV, often known as the shadow share price. The less typical application of the term “shadow price” is, however, when discussing money market funds. The process of cost-benefit analysis in business decision-making is where it is used more commonly.
A shadow price is typically defined as a “artificial” price applied to an asset or accounting entry that is not priced. Shadow pricing is frequently influenced by cost or value presumptions. In general, it is an arbitrary and imprecise endeavour.
