IDEAS home Printed from https://ideas.repec.org/p/uwo/epuwoc/20082.html
   My bibliography  Save this paper

Removing Some Dissonance From the Social Discount Rate Debate

Author

Abstract

In an economy with a capital income tax distortion, the social discount rate (SDR) should reflect the social opportunity cost of capital rather than the social rate of time preference (consumption rate of interest) to ensure that public investments can produce Pareto improvements. The marginal cost of funds may exceed unity for a lump sum tax, but it is irrelevant for project evaluation. Even if a social welfare improvement is judged to be possible without passing the compensation test, the SDR should still reflect the social opportunity cost of capital to ensure that the project is the most efficient use of public funds.

Suggested Citation

  • David Burgess, 2008. "Removing Some Dissonance From the Social Discount Rate Debate," University of Western Ontario, Economic Policy Research Institute Working Papers 20082, University of Western Ontario, Economic Policy Research Institute.
    • Handle: RePEc:uwo:epuwoc:20082
    as

    Download full text from publisher

    File URL: https://ir.lib.uwo.ca/cgi/viewcontent.cgi?article=1046&context=economicsepri_wp
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. repec:bla:econom:v:38:y:1971:i:152:p:395-412 is not listed on IDEAS
    2. Wildasin, David E, 1984. "On Public Good Provision with Distortionary Taxation," Economic Inquiry, Western Economic Association International, vol. 22(2), pages 227-243, April.
    3. Timothy J. Bartik, 2008. "Evaluating the Benefits of Non-marginal Reductions in Pollution Using Information on Defensive Expenditures," Book chapters authored by Upjohn Institute researchers, in: Joseph Herriges & Catherine L. Kling (ed.),Revealed Preference Approaches to Environmental Valuation, volume 0, pages 459-475, W.E. Upjohn Institute for Employment Research.
    4. Douglas M. Larson, 1993. "On Measuring Existence Value," Land Economics, University of Wisconsin Press, vol. 69(4), pages 377-388.
    5. David F. Burgess, 1988. "Complementarity and the Discount Rate for Public Investment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 103(3), pages 527-541.
    6. Browning, Edgar K, 1987. "On the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 77(1), pages 11-23, March.
    7. Bradford, David F, 1975. "Constraints on Government Investment Opportunities and the Choice of Discount Rate," American Economic Review, American Economic Association, vol. 65(5), pages 887-899, December.
    8. Liqun Liu & Andrew J. Rettenmaier & Thomas R. Saving, 2005. "Discounting according to Output Type," Southern Economic Journal, John Wiley & Sons, vol. 72(1), pages 213-223, July.
    9. repec:bla:econom:v:41:y:1974:i:161:p:52-61 is not listed on IDEAS
    10. Sjaastad, Larry A & Wisecarver, Daniel L, 1977. "The Social Cost of Public Finance," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 513-547, June.
    11. Charles L. Ballard & Don Fullerton, 1992. "Distortionary Taxes and the Provision of Public Goods," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 117-131, Summer.
    12. SANDMO, Agnar & DREZE, Jacques H., 1971. "Discount rates for public investment in closed and open economies," LIDAM Reprints CORE 98, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    13. Liu, Liqun, 2003. "A marginal cost of funds approach to multi-period public project evaluation: implications for the social discount rate," Journal of Public Economics, Elsevier, vol. 87(7-8), pages 1707-1718, August.
    14. Courant, Paul N. & Porter, Richard C., 1981. "Averting expenditure and the cost of pollution," Journal of Environmental Economics and Management, Elsevier, vol. 8(4), pages 321-329, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Coppola, Andrea & Fernholz, Fernando & Glenday, Graham, 2014. "Estimating the economic opportunity cost of capital for public investment projects : an empirical analysis of the Mexican case," Policy Research Working Paper Series 6816, The World Bank.
    2. Glenn Jenkins & Chun-Yan Kuo, 2007. "The Economic Opportunity Cost of Capital for Canada - An Empirical Update," Development Discussion Papers 2007-04, JDI Executive Programs.
    3. Aygul Ozbafli & Chun-Yan Kuo & Glenn Jenkins, 2007. "Cost-benefit Analysis Case Study On Regulations To Lower The Level Of Sulphur In Gasoline," Working Paper 1134, Economics Department, Queen's University.
    4. Ferda Halicioglu & Cevat Karatas, 2011. "Estimation of Economic Discounting Rate for Practical Project Appraisal: The Case of Turkey," Journal of Developing Areas, Tennessee State University, College of Business, vol. 45(1), pages 155-166, July-Dece.
    5. Glenn Jenkins & Chun-Yan Kuo & Arnold C. Harberger, 2011. "Cost-Benefit Analysis for Investment Decisions: Chapter 8 (The Economic Opportunity Cost of Capital)," Development Discussion Papers 2011-08, JDI Executive Programs.
    6. Johansson Per-Olov & Kriström Bengt, 2011. "Comment on Burgess and Zerbe: On Bank Market Power and the Social Discount Rate," Journal of Benefit-Cost Analysis, De Gruyter, vol. 2(3), pages 1-6, August.
    7. Glenn Jenkins & CHUN-YAN KUO & JOHN GIRALDEZ, 2007. "Canadian Regulatory Cost-Benefit Analysis Guide," Development Discussion Papers 2007-03, JDI Executive Programs.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Liqun Liu & Andrew J. Rettenmaier & Thomas R. Saving, 2004. "A Generalized Approach to Multigeneration Project Evaluation," Southern Economic Journal, John Wiley & Sons, vol. 71(2), pages 377-396, October.
    2. Burgess, David F., 2013. "Reconciling alternative views about the appropriate social discount rate," Journal of Public Economics, Elsevier, vol. 97(C), pages 9-17.
    3. Liqun Liu & Andrew J. Rettenmaier & Thomas R. Saving, 2005. "Discounting according to Output Type," Southern Economic Journal, John Wiley & Sons, vol. 72(1), pages 213-223, July.
    4. Liu, Liqun, 2003. "A marginal cost of funds approach to multi-period public project evaluation: implications for the social discount rate," Journal of Public Economics, Elsevier, vol. 87(7-8), pages 1707-1718, August.
    5. Ming Chung Chang & Shufen Wu, 2011. "Should Marginal Cost of Public Funds include the Revenue Effect?," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 147(I), pages 1-16, March.
    6. Liqun Liu, 2004. "The Marginal Cost of Funds and the Shadow Prices of Public Sector Inputs and Outputs," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(1), pages 17-29, January.
    7. Liqun Liu, 2006. "Combining Distributional Weights and the Marginal Cost of Funds," Public Finance Review, , vol. 34(1), pages 60-79, January.
    8. Liqun Liu, 2005. "The Multi-Period Cost-Benefit Rule with Mobile Capital and Distorted Labor," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 12(2), pages 145-158, March.
    9. Auriol, Emmanuelle & Warlters, Michael, 2012. "The marginal cost of public funds and tax reform in Africa," Journal of Development Economics, Elsevier, vol. 97(1), pages 58-72.
    10. James E. Anderson & Will Martin, 2011. "Costs of Taxation and Benefits of Public Goods with Multiple Taxes and Goods," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 13(2), pages 289-309, April.
    11. 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).
    12. Parry, Ian W.H., 1999. "Tax Deductions, Consumption Distortions, and the Marginal Excess Burden of Taxation," Discussion Papers 10801, Resources for the Future.
    13. Ian W.H. Parry, 2002. "A Second-Best Analysis of Environmental Subsidies," Chapters, in: Lawrence H. Goulder (ed.), Environmental Policy Making in Economies with Prior Tax Distortions, chapter 28, pages 555-572, Edward Elgar Publishing.
    14. Sandmo, Agnar, 1998. "Redistribution and the marginal cost of public funds," Journal of Public Economics, Elsevier, vol. 70(3), pages 365-382, December.
    15. Dahlby, Bev, 2009. "The Optimal Taxation Approach to Intergovernmental Grants," Working Papers 2009-16, University of Alberta, Department of Economics.
    16. Will Martin & James E. Anderson, 2005. "Costs of Taxation and the Benefits of Public Goods: The Role of Income Effects," Boston College Working Papers in Economics 617, Boston College Department of Economics.
    17. Chris Jones, 2005. "Why the Marginal Social Cost of Funds is not the Shadow Value of Government Revenue," ANU Working Papers in Economics and Econometrics 2005-449, Australian National University, College of Business and Economics, School of Economics.
    18. Bas Jacobs, 2018. "The marginal cost of public funds is one at the optimal tax system," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(4), pages 883-912, August.
    19. Bovenberg, A. Lans & Goulder, Lawrence H., 2002. "Environmental taxation and regulation," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 23, pages 1471-1545, Elsevier.
    20. Warlters, Michael & Auriol, Emmanuelle, 2005. "The marginal cost of public funds in Africa," Policy Research Working Paper Series 3679, The World Bank.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:uwo:epuwoc:20082. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://economics.uwo.ca/research/research_papers/epri_workingpapers.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.