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The most appropriate discount rate

Published online by Cambridge University Press:  19 January 2015

David F. Burgess  and
Richard O. Zerbe
David F. Burgess
Affiliation:
Department of Economics, Western Ontario University, London, Ontario
Richard O. Zerbe*
Affiliation:
University of Washington, Seattle
*
Richard O. Zerbe, University of Washington, Seattle, e-mail: zerbe@uw.edu
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Abstract

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The social opportunity cost of capital discount rate is the appropriate discount rate to use when evaluating government projects. It satisfies the fundamental rule that no project should be accepted that has a rate of return less than alternative available projects, and it ensures that worthy projects satisfy the potential Pareto test. The social time preference approach advocated by Moore et al. fails to satisfy either of these criteria even in the unlikely case that the private sector behaves myopically with respect to a project’s future benefits and costs.

Type
Comments
Information
Journal of Benefit-Cost Analysis , Volume 4 , Issue 3 , 01 December 2013 , pp. 391 - 400
Copyright
Copyright © Society for Benefit-Cost Analysis 2013

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