Generally, estimation of changes in social surplus requires knowledge of entire demand and supply schedules. The previous chapter discusses direct estimation of demand and supply curves, focusing on the demand curve for the purpose of measuring consumer surplus. It assumes that there is a market demand curve for the good in question, such as garbage collection or gasoline, and we can observe at least one point on this demand curve. In many applications of CBA, however, the markets for certain “goods,” such as human life or pollution, do not exist or are imperfect for reasons discussed in Chapter 4. In these situations it may be impossible to estimate or inappropriate to use the market demand (or supply) curve directly. In the past, such goods were treated as “intangible,” and their impacts were excluded or analysts were restricted to qualitative CBA or multigoal analysis. However, over the past 30 years, economists have devised methods to value these impacts, thus enabling analysts to conduct (comprehensive) CBA.

In practice, the change in social surplus can often be estimated from knowledge of the impact of a policy (e. g., number of affected persons) and the marginal social benefit or the marginal social cost of one more unit of the affected good or service. In a perfect market, the market price equals both the marginal social cost and the marginal social benefit of an additional unit of a good or service. When a market does not exist or market failure leads to a divergence between market price and marginal social cost, analysts try to obtain estimates of what the market price would be if the relevant good were traded in a market where the demand curve measured marginal social benefits and the supply curve measured marginal social costs. As we discuss in Chapter 4, such an estimate is called a shadow price.

When a market for the good of interest does not exist, one of two major methods of estimating shadow prices can be used. This chapter recognizes that although there may not be a market for the good or service of interest, its value (shadow price) may be reflected indirectly in the market for a related good.