Shadow prices and substitution in trade distorted economies

This paper derives simple and operational shadow pricing rules in a three-sector, three-factor general equilibrium model incorporating nontraded goods. Under the Little-Mirrlees method, if a single simple and empirically plausible condition is satisfied, the accounting ratio for land will exceed unity and those for capital and labor will lie below unity. If this condition is not satisfied or cannot be verified, it is still possible to fix some accounting ratios above or below unity just from knowledge of the signs of substitution patterns in consumption and factor intensity patterns in production. Guidelines are also derived for setting the shadow prices of nontraded goods or quota restricted imports. It is shown that the alternative, domestic price method generally yields less useful guidelines than the Little-Mirrlees method.