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Public Sector Discount Rates: A Comparison of Alternative Approaches

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  • John Creedy
  • Hemant Passi

Abstract

This article describes alternative approaches to the public sector discount rate and explains the assumptions involved. Time†varying rates are also considered. The social opportunity cost of capital (SOC) is the rate of return that could be earned on the ‘next best alternative’. The social rate of time preference (SRTP) is the rate of return required in order to divert resources to a public investment. Only in an ‘ideal’ market are these two rates brought into alignment in equilibrium. Essentially the discount rate reflects how the government values the future when making decisions on behalf of society: value judgements are unavoidable.

Suggested Citation

  • John Creedy & Hemant Passi, 2018. "Public Sector Discount Rates: A Comparison of Alternative Approaches," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 51(1), pages 139-157, March.
    • Handle: RePEc:bla:ausecr:v:51:y:2018:i:1:p:139-157
    DOI: 10.1111/1467-8462.12252
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    6. Ioannis E. Kosmadakis & Costas Elmasides & Dimitrios Eleftheriou & Konstantinos P. Tsagarakis, 2019. "A Techno-Economic Analysis of a PV-Battery System in Greece," Energies, MDPI, vol. 12(7), pages 1-14, April.

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    More about this item

    JEL classification:

    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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