Metrics play a powerful role in decision-making, not only by informing choices but by shaping what is considered important. In the context of evidence-based policy, a common concern is that more easily measurable aspects of an issue tend to dominate the agenda, while equally important but less quantifiable factors may be overlooked.
The Beyond GDP movement highlights that new metrics are necessary to get a better, more reliable picture of the 21st century economy and society, their progress and sustainability. New metrics should give us an idea also of how progress is distributed across different people with different needs, and across generations. One important aspect here is neglected “missing capitals” that are important for assessing the growth of an economy, sustainability and welfare.
A new ESCoE discussion paper by Diane Coyle and Julia Wdowin explores valuation approaches to account for these “missing capitals” (natural, cultural and heritage, human, and intangible capitals).
Shadow prices
Shadow prices, or accounting prices, measure an asset’s social value in ways that simple exchange prices (the market-equivalent transaction value) cannot.
Considering shadow prices reflects an effort to develop more informative metrics for both policymakers and the broader public. They aim to deliver an understanding of the economy that better relates to peoples’ reality and captures economic progress as it is experienced on the ground.
Shadow prices, as estimates of economic value, play a key role in advancing inclusive wealth measurement frameworks. These frameworks are concerned with missing capitals that are more likely to be omitted from standard accounts of national wealth, but which are crucial to evaluating changes in economic welfare over the longer-term. Read more about the role of missing capitals in measuring social welfare in this earlier blog post.
Standard national accounting practice
There is plenty of work being done on measuring the value of missing capital assets, such as environmental and ecosystem assets, human capital assets or intangible assets like digital goods. Work on valuation of these assets has been predominantly carried out in line with standard national accounting principles (2025 SNA), namely at exchange values. However, this approach has several limitations in terms of its scope and applicability.
Firstly, many missing capital assets do not have a market price. This is one of the reasons why they tend to be “missing”: they are not easily measured. We can think of local parks, or a parent helping their child with homework. In the substantial existing literature, efforts have been made to measure the value of non-market goods. The most progress has been made in environmental accounting, thanks to the frameworks that stem from the UN System of Environmental-Economic Accounting-Central Framework, and that provide guidelines for valuing environmental and ecosystem services.
Secondly, while non-market valuation methods are used to estimate the value of these services, it’s unclear whether these estimates are truly comparable to the exchange values used for other items in the National Accounts. This raises concerns about consistency and comparability across the accounts.
New valuation approaches
Considering these limitations, shadow pricing is one distinct yet complementary valuation strategy. Shadow prices are intended to reflect the social welfare value of assets (not only their private value to individuals). In this sense, they capture a wider range of benefits and costs associated with the given asset, not accounted for in the market-equivalent valuation of private costs or benefits and attempt a valuation that is more in line with the asset’s broader value.
Shadow prices could offer an alternative metric that conveys a different dimension of value for capital assets. The paper presents shadow prices as the social welfare value estimates of capital assets. In other words, they measure the overall costs and benefits associated with a given capital asset or service, for example considering externalities. Externalities are the remaining costs and benefits linked to an asset that are not included in the market price or market price equivalent estimate.
Therefore, shadow prices offer a broader and more comprehensive perspective on the value of assets, providing a fuller picture of their value to society. This makes them a potentially valuable tool for policymakers, especially those focused on long-term sustainability or evaluating the social returns on investment decisions.
The paper clarifies what is at times a confused literature on shadow prices, distinguishing these from exchange values.
Key questions
The paper proposes two main questions to be considered when defining exchange values and shadow prices:
(1) The scope of the valuation of the asset or capital service, i.e. whether externalities are included or not;
2) Whether valuations of assets or capital services are marginal or average valuations.
Other questions the paper puts forward:
- How can we assess the value of an asset when benefits are received by different economic owners? For example, whilst not being the owner of a local park, one can benefit from it.
- How can we deal with assets that are partly accounted for in standard national accounting but that have further costs and benefits that are not accounted for? For instance, with trees, timber is accounted for but the aesthetic qualities are not.
A notable finding of the paper is that due to inconsistent use of the term “shadow prices,” existing estimates do not always reflect the same underlying value concept.
Why does this matter?
The paper provides a roadmap for understanding shadow prices as conceptually distinct from exchange value estimation. Fundamentally, it highlights that different valuation measures serve different purposes. The proposed measure has the potential to provide the basis for a richer information set on the broader value of different capital assets. This will help to avoid underestimating the real value of assets crucial to economic welfare or over-estimating the value of those with more limited contributions.
The next step is to review the methods used to estimate exchange values for non-market assets, to assess which are most suitable for advancing shadow price estimation.
ESCoE blogs are published to further debate. Any views expressed are solely those of the author(s) and so cannot be taken to represent those of the ESCoE, its partner institutions or the Office for National Statistics.