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On Measuring the Social Opportunity Cost of Public Funds

In: Project Evaluation

Author

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  • Arnold C. Harberger

    (University of Chicago)

Abstract

The literature on project evaluation abounds with competing recommendations as to what rate of interest should be used to discount to a single point in time the estimated costs and benefits of public-sector projects. Official policy in the United States, as established in the Green Book1 and in Senate Resolutions, is to base public-sector investment decisions on interest rates prevailing or expected to prevail in the market for government bonds. An alternative, proposed by such authors as Hirshleifer, DeHaven and Milliman, Strotz, and Stockfisch, is to discount benefits and costs at the estimated marginal productivity of capital in the private sector of the economy. A third group, to which Marglin and Sen belong, asserts that market interest rates give an exaggerated picture of the rate of ‘social time preference’, and suggests that that rate be chosen which represents the consensus of the policy-makers (or of the society as a whole) concerning what the social time preference rate really is or should be. I shall defer discussion of social time preference rates, thus arbitrarily defined, to a later point, and shall instead assume that the ‘social rate of time preference’ refers to an appropriately weighted average of the different marginal rates of time preference applicable to the individuals who compose the society.

Suggested Citation

  • Arnold C. Harberger, 1972. "On Measuring the Social Opportunity Cost of Public Funds," Palgrave Macmillan Books, in: Project Evaluation, chapter 0, pages 94-122, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-349-01653-2_4
    DOI: 10.1007/978-1-349-01653-2_4
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    Citations

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    Cited by:

    1. Slemrod, Joel & Hansen, Carl & Procter, Roger, 1997. "The seesaw principle in international tax policy," Journal of Public Economics, Elsevier, vol. 65(2), pages 163-176, August.
    2. Ahmed Badawi, 2003. "Private capital formation and public investment in Sudan: testing the substitutability and complementarity hypotheses in a growth framework," Journal of International Development, John Wiley & Sons, Ltd., vol. 15(6), pages 783-799.
    3. Li, Qingran & Pizer, William A., 2021. "Use of the consumption discount rate for public policy over the distant future," Journal of Environmental Economics and Management, Elsevier, vol. 107(C).
    4. Chun-Yan Kuo & Glenn Jenkins, 2007. "The Economic Opportunity Cost Of Capital For Canada - An Empirical Update," Working Paper 1133, Economics Department, Queen's University.
    5. Glenn Jenkins & CHUN-YAN KUO & JOHN GIRALDEZ, 2007. "Canadian Regulatory Cost-Benefit Analysis Guide," Development Discussion Papers 2007-03, JDI Executive Programs.
    6. Kevin Rennert & Brian C. Prest & William A. Pizer & Richard G. Newell & David Anthoff & Cora Kingdon & Lisa Rennels & Roger Cooke & Adrian E. Raftery & Hana Sevcikova & Frank Errickson, 2021. "The Social Cost of Carbon: Advances in Long-Term Probabilistic Projections of Population, GDP, Emissions, and Discount Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 52(2 (Fall)), pages 223-305.
    7. Zhangallimbay, Donald & Castillo, José Gabriel, 2021. "The social discount rate in the evaluation of investment projects: an application for Ecuador," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), August.
    8. Glenn P. Jenkins & Chun-Yan Kuo & Sener Salci, 2013. "Measuring The Foreign Exchange Premium And The Premium For Non-Tradable Outlays For Twenty Countries In Africa," Development Discussion Papers 2013-05, JDI Executive Programs.
    9. Moore Mark A. & Boardman Anthony E. & Vining Aidan R., 2013. "More appropriate discounting: the rate of social time preference and the value of the social discount rate," Journal of Benefit-Cost Analysis, De Gruyter, vol. 4(1), pages 1-16, March.

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