Factor Transfers

Factor transfers, K, are defined as the difference between the costs of all factors of production (unskilled and skilled labor and capital) valued in actual market prices, C, and the social costs of these factors, G. One distinguishes between the inefficiency-causing effects of distorting policies affecting either output or factor markets and of market failures in factor markets.

The existence of factor market failures in developing countries is the rule rather than the exception. Analysts will usually assume that factor markets are going to be imperfect unless careful examination shows that the private factor prices are reasonable approximations of social prices. An illustration of factor transfer interpretation is given in Box 12.4.