PART III. SOCIAL VALUATION IN THE POLICY ANALYSIS MATRIX

VI. SOCIAL VALUATION OF COMMODITIES

World prices and technologies are the backbones of social valuation and efficiency analysis of agricultural systems. The first section of this chapter uses the simple general equilibrium model of production to show how an economy attains its highest levels of output and income by using world prices. In this process of maximization, factor prices are determined, providing the basis for social valuation of new commodity systems. If a new commodity system is unable to pay the social costs of domestic factor inputs under world prices, national income could be increased by using domestic factors in some other commodity system.

Because world prices are quoted in foreign currency, a foreign-exchange rate is needed to convert world prices from foreign to domestic currency. Typically, entries in the PAM matrix are presented in domestic currency, because data on revenues and costs in private prices are collected in domestic currency and corrections for market failures and estimates of social prices of factors are easier to make in local currency than in foreign currency. Estimation of the PAM in terms of foreign currency would provide no shortcuts, because a foreign-exchange rate would be needed to convert all domestic currency values to foreign currency equivalents. The issue then becomes whether the official exchange rate-if fixed by the government and administered by the central bank-is an appropriate choice for conversion. The second section of this chapter considers the circumstances in which other exchange-rate measures might be used for social price determination. The final section considers the treatment of nontradable commodities. Because these commodities lack world markets (by definition), social valuation of nontradables is based on calculations of social costs of production.