Concluding Comments

Social valuation of domestic factors is the most difficult aspect of social cost accounting. The critical first step in estimating the social prices of factors is the development of a consistent framework in which to identify divergences. The exercise of quantification becomes a series of sequential adjustments to private market factor prices to recognize the effects of factor and commodity market divergences and the indirect effects of macroeconomic distortion and input substitution. As in all shadow pricing methods, complete knowledge of the response of commodity systems to price changes is necessary to derive exact estimates of social values.

Empirical estimates of social factor prices are thus approximations, and the analyst will be forced to make arbitrary judgments about what constitutes large and small changes. But so long as such judgments are male evident to others, better information or alternative ideas can be introduced to modify the results. The advantage of the approach developed here is its adaptability to different amounts of information. Because most of the potential errors in evaluation are introduced through their effects on domestic factor prices, only a small number of variables (perhaps only the wage rate and the rate of return to capital) need adjustment in the recalculation of social profitability.