--- title: "EIA; shadow pricing, externalities, social CBA" subject: "Project Engineering" chapter: 2 key: "semester_7/project_engineering:eia-shadow-pricing-externalities" source: https://www.bctengineer.com/q/semester_7/project_engineering/eia-shadow-pricing-externalities site: BCT Engineering --- # EIA; shadow pricing, externalities, social CBA Project Engineering · Chapter 2: Project Appraisal and Project Formulation - Asked in: 2067 Asar (old course), 8 marks - Answer checked by Claude Opus 5.5 (high effort) on 2026-10-14 - Page: https://www.bctengineer.com/q/semester_7/project_engineering/eia-shadow-pricing-externalities - Whole chapter: https://www.bctengineer.com/md/semester_7/project_engineering/chapter-2 ## Question Describe environmental impact analysis. Explain in brief shadow pricing, market externalities, market imperfection and social cost benefit analysis. ## Short answer EIA is a systematic study to identify, predict, and mitigate a project's environmental effects. Shadow pricing uses true opportunity cost to correct for distorted market prices; externalities are uncompensated side effects; market imperfection arises from monopoly, taxes, or subsidies; social cost benefit analysis (SCBA) evaluates net benefits to society using shadow prices and includes externalities. ## Answer #### Environmental impact analysis **Environmental Impact Assessment (EIA)** is a systematic study to identify, predict, evaluate and mitigate the positive and negative effects of a proposed project on the physical, biological, social and cultural environment before decisions are taken. In Nepal, it is required by the Environment Protection Act, 2019 and Environment Protection Rules, 2020: IEE for smaller projects and full EIA for larger ones (for example hydropower above 50 MW, roads in sensitive areas). #### Steps 1. Screening: decide whether IEE or EIA is needed. 2. Scoping: identify key issues and prepare the terms of reference. 3. Baseline study of existing environment. 4. Impact identification and prediction (checklist, matrix, network, overlay). 5. Evaluation of significance and comparison of alternatives. 6. Mitigation measures and Environmental Management Plan. 7. Report preparation, public hearing and review. 8. Approval, monitoring and auditing. #### Shadow pricing A **shadow price** is the true economic (opportunity) cost or value of a good to society, used when the market price is distorted by taxes, subsidies, controls or monopoly. - Unskilled labour in a country with unemployment has a shadow wage lower than the market wage. - Imported goods are valued at border (CIF) prices, with a shadow exchange rate if the official rate is unrealistic. - Taxes, duties and subsidies are transfer payments and are removed. #### Market externalities Externalities are side effects of a project on people not involved in it, not reflected in market prices. - Negative: pollution from a factory, noise, loss of farmland. - Positive: a road increases land value and trade for nearby people. In social CBA they are valued and included. #### Market imperfection Markets are imperfect when prices do not show true cost or value because of monopoly, government control, lack of information, taxes or subsidies, and restricted entry. Then market prices cannot be used directly in economic analysis, and shadow prices are needed. #### Social cost benefit analysis SCBA evaluates a project from the viewpoint of the whole society. It uses shadow prices, includes externalities and intangible effects and excludes transfers, discounted at a social discount rate. The project is accepted if the economic NPV is positive and $B/C > 1$ (or EIRR is above the social discount rate). ## Check yourself The answer's key points as multiple-choice questions, with the correct option and why. 1. A shadow price is: A. The market price including taxes B. The true economic opportunity cost or value to society when market prices are distorted C. The price set by the contractor D. The price after subsidy Answer: B. Shadow prices correct distortions from taxes, subsidies, controls or monopoly. (Key point: Shadow price) 2. In a country with unemployment, the shadow wage of unskilled labour is: A. Higher than the market wage B. Equal to the tax rate C. Lower than the market wage D. Always zero Answer: C. Because the labour has low opportunity cost, its shadow wage is below the market wage. (Key point: Shadow wage) 3. Which is a positive externality of a road project? A. Noise to nearby residents B. Loss of farmland C. Increase in land value and trade for nearby people D. Pollution Answer: C. Externalities are side effects on outsiders not in market prices; higher land value is a positive one. (Key point: Externalities) 4. How does SCBA treat taxes, duties and subsidies? A. Includes them as benefits B. Removes them as transfer payments C. Doubles them D. Treats them as externalities Answer: B. Transfers only move money within society, so they are excluded. (Key point: SCBA treatment) ## Related in Project Engineering - [Socio-economic survey and social cost benefit analysis](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Asocio-economic-survey-scba) — Project Engineering, chapter 2, asked 3× - [Project proposal; cost benefit analysis for road](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Aproposal-cba-road-project) — Project Engineering, chapter 2 - [Short note: Cost-benefit analysis](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Acost-benefit-analysis-note) — Project Engineering, chapter 2 - [EIA, environmental impacts, checklist method](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Aeia-problems-impacts-checklist) — Project Engineering, chapter 2 - [EIA; environmental problems in Nepal](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Aeia-nepal-problems-improve) — Project Engineering, chapter 2 - [Short note: EIA](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Aeia-short-note) — Project Engineering, chapter 2 ## Related in other subjects - [Cost-plus pricing numerical](https://www.bctengineer.com/question.md?key=semester_7%2Fentrepreneurship_development%3Apricing-cost-plus-numerical) — Entrepreneurship Development, chapter 3 - [Short note: Impact of social networking and blogs](https://www.bctengineer.com/question.md?key=semester_7%2Fweb_technology%3Ashort-note-social-networking-blogs) — Web Technology, chapter 6 - [PROR environmental impact and schematic](https://www.bctengineer.com/question.md?key=semester_8%2Fpower_plant_design%3Apror-environmental-impact) — Power Plant Design, chapter 3 - [Optimize capacity by marginal cost-benefit](https://www.bctengineer.com/question.md?key=semester_7%2Fhydropower_engineering%3Amarginal-cost-benefit-installed-capacity) — Hydropower Engineering, chapter 3