The paper "Sensitivity and Risk Analysis and Use of Shadow Prices" is a good example of a macro & microeconomics essay. In the world today, water has become a treasured natural resource and its allocation, especially in developing countries, is characterized by a range of economic issues. As such in evaluating the economic models used to allocate water, the situation is complicated by a few factors. Reforms of water pricing as a tool for improving the efficient use of water is a major concern to water economists. There are various aspects that are critical in evaluating water projects as well as water projects appraisal.
The sensitivity and risk analysis of water projects is among the aspects that need assessment in order to determine those variables that may lead to the success or failure of the water projects. In addition, water projects are focused on pricing in order to maximize profit for investments. However, this may lead to shadow pricing which may have a significant impact on the social wellbeing of the community served by the water project. This research essay takes a closer look at and as well discusses approaches relating to shadow water pricing and sensitivity risk analysis in regard to economic evaluation water projects.
In shadow prices, the paper will evaluate and explain the various ways in which water projects managers can adopt the best pricing policies to avoid social problems that may result from shadow prices. This will include the methods of determining prices that can be recommended. In the water project, the viability of the project is evaluated in comparison with the internal return rate for the financial costs of the capital required in the water project.
Additionally, water projects are considered to be viable when there is a positive net present value. Therefore, sensitivity and risk analysis in a water project is done to evaluate the changes in the most salient variables that determine the water project worthiness. In the sensitivity and risk analysis, the paper will cover those variables which focus on the success of the water projects. This will include the purpose of analysis and its aspects as well as the analysis process and its implications in water projects.
Asian Development Bank, 2003. Handbook for integrating risk analysis in the economic analysis of projects. Mandaluyong City: Asian Development Bank.
Ali, I., 1990. Interrelationship between Shadow Prices, Project Investment and Policy Reforms - An Analytical Framework. [Online] Available at: < http://www.adb.org/sites/default/files/pub/1990/rs52.pdf>. Accessed 23 April, 2013.
Bringham, E., & Ehrhardt, M., 2011. Financial Management: Theory and Practice. New York: Cengage Learning.
Balassa, B., 1977. The ‘Effects Method’ Of Project Evaluation Once Again. Oxford Bulletin of Economics and Statistics, vo. 39, no. 4, pp. 345–353.
EDRC, 1997, Guidelines for the Economic Analysis of Projects. [Online] Available at
Giannoccaro Giacomo, Prosperi Maurizio & Giacomo Zanni, 2010, Assessing the Impact of Alternative Water Pricing Schemes on Income Distribution, Journal of Agricultural Economics, Vol. 61, No. 3, pp. 527–544.
Loehman, E. T., 2008, Pricing for water conservation with cost recovery. Water Resources Research, vol. 44, no. 8, pp. 1-13.
McLaney, E., 2009. Business Finance: Theory and Practice: New Jersey: Financial Times Prentice Hall
Papps, I, 1993. Shadow Pricing With Price Controls. Srorrish Journal of Polincal Economy, Vol. 40, No. 2. pp. 199-209.
Qureshi, M. E., Proctor, W., Young, M. & Wittwer, G., 2012. The Economic Impact of Increased Water Demand in Australia: A Computable General Equilibrium Analysis. Economic Papers, vol. 31, no. 1, pp. 87–102.
Weiss, J., and Ward, K., 2013. Projects and Risk’ in Weiss J. and Potts D. eds. Current Issues in Project Analysis for Development. Camberley: Edward Elgar Publishing