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The most appropriate discount rate

Author

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  • Burgess David F.

    (Department of Economics, Western Ontario University, London, Ontario)

  • Zerbe Richard O.

    (University of Washington, Seattle)

Abstract

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.

Suggested Citation

  • Burgess David F. & Zerbe Richard O., 2013. "The most appropriate discount rate," Journal of Benefit-Cost Analysis, De Gruyter, vol. 4(3), pages 391-400, December.
    • Handle: RePEc:bpj:jbcacn:v:4:y:2013:i:3:p:391-400:n:6
    DOI: 10.1515/jbca-2013-0016
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    References listed on IDEAS

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    1. Scott Farrow & W. Kip Viscusi, 2013. "Towards principles and standards for the benefit–cost analysis of safety," Chapters, in: Scott O. Farrow & Richard Zerbe, Jr. (ed.), Principles and Standards for Benefit–Cost Analysis, chapter 5, pages 172-193, Edward Elgar Publishing.
    2. Richard O. Zerbe & Tyler Blake Davis & Nancy Garland & Tyler Scott, 2013. "Conclusion: principles and standards for benefit–cost analysis," Chapters, in: Scott O. Farrow & Richard Zerbe, Jr. (ed.), Principles and Standards for Benefit–Cost Analysis, chapter 11, pages 364-443, Edward Elgar Publishing.
    3. Glenn W. Harrison & Morten I. Lau & Melonie B. Williams, 2002. "Estimating Individual Discount Rates in Denmark: A Field Experiment," American Economic Review, American Economic Association, vol. 92(5), pages 1606-1617, December.
    4. Stern,Nicholas, 2007. "The Economics of Climate Change," Cambridge Books, Cambridge University Press, number 9780521700801.
    5. Moore Mark A. & Vining Aidan R. & Boardman Anthony E., 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.
    6. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
    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. David F. Burgess & Richard O. Zerbe, 2013. "Appropriate discounting for benefit–cost analysis," Chapters, in: Scott O. Farrow & Richard Zerbe, Jr. (ed.), Principles and Standards for Benefit–Cost Analysis, chapter 7, pages 247-263, Edward Elgar Publishing.
    9. Scott O. Farrow & Richard Zerbe, Jr. (ed.), 2013. "Principles and Standards for Benefit–Cost Analysis," Books, Edward Elgar Publishing, number 15126.
    10. Liqun Liu, 2011. "From the Shadow Price of Capital to the Marginal Cost of Funds: In Search of the Implementation of a Principle," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 13(3), pages 369-389, June.
    11. William D. Nordhaus, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 686-702, September.
    12. Burgess, David F. & Zerbe, Richard O., 2011. "Appropriate Discounting for Benefit-Cost Analysis," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 2(2), pages 1-20, April.
    13. Ben Groom & Cameron Hepburn & Phoebe Koundouri & David Pearce, 2005. "Declining Discount Rates: The Long and the Short of it," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 32(4), pages 445-493, December.
    14. Burgess, David F., 2013. "Reconciling alternative views about the appropriate social discount rate," Journal of Public Economics, Elsevier, vol. 97(C), pages 9-17.
    15. Partha Dasgupta, 2008. "Discounting climate change," Journal of Risk and Uncertainty, Springer, vol. 37(2), pages 141-169, December.
    16. C. Leigh ANDERSON & Mary Kay GUGERTY, 2009. "Intertemporal Choice And Development Policy: New Evidence On Time‐Varying Discount Rates From Vietnam And Russia," The Developing Economies, Institute of Developing Economies, vol. 47(2), pages 123-146, June.
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    Citations

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    Cited by:

    1. Monika Foltyn-Zarychta & Rafał Buła & Krystian Pera, 2021. "Discounting for Energy Transition Policies—Estimation of the Social Discount Rate for Poland," Energies, MDPI, vol. 14(3), pages 1-21, January.
    2. Mark A. Moore & Anthony E. Boardman & Aidan R. Vining, 2020. "Social Discount Rates for Seventeen Latin American Countries: Theory and Parameter Estimation," Public Finance Review, , vol. 48(1), pages 43-71, January.
    3. Moore, Mark A. & Boardman, Anthony E. & Vining, Aidan R., 2013. "The choice of the social discount rate and the opportunity cost of public funds," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 4(3), pages 401-409, December.
    4. de Rus, Ginés & Socorro, M. Pilar, 2014. "Access pricing, infrastructure investment and intermodal competition," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 70(C), pages 374-387.
    5. Spackman, Michael, 2021. "Social discounting and the cost of public funding in practice," LSE Research Online Documents on Economics 111490, London School of Economics and Political Science, LSE Library.
    6. Tamai, Toshiki, 2023. "The rate of discount on public investments with future bias in an altruistic overlapping generations model," European Journal of Political Economy, Elsevier, vol. 79(C).
    7. Peter Abelson & Tim Dalton, 2018. "Choosing the Social Discount Rate for Australia," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 51(1), pages 52-67, March.
    8. Szekeres, Szabolcs, 2023. "The simple answer to the Social Discount Rate question," MPRA Paper 117843, University Library of Munich, Germany.
    9. Broughel, James, 2021. "Rehabilitating the Opportunity Cost of Capital in Cost–Benefit Analysis," Working Papers 11433, George Mason University, Mercatus Center.
    10. Liqun Liu & Andrew J. Rettenmaier & Thomas R. Saving, 2021. "Discounting Environmental Benefits for Future Generations," Public Finance Review, , vol. 49(1), pages 41-70, January.
    11. Szekeres, Szabolcs, 2024. "Resolving the Discounting Dilemma," MPRA Paper 120014, University Library of Munich, Germany.
    12. Szekeres, Szabolcs, 2023. "Opportunity Cost of Capital, Marginal Cost of Funds and Numeraires in Benefit-Cost Analysis," MPRA Paper 120058, University Library of Munich, Germany, revised 06 Feb 2024.

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