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The Social Opportunity Cost of Capital in the Presence of Labour Market Distortions

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  • David F. Burgess

Abstract

This paper examines the conditions under which the social opportunity cost of capital in a tax distorted economy is equal to the gross of tax return to capital plus the excess of the market over the shadow wage bill. Whenever public investment serves as an unpriced (or underpriced) input in the private sector's production process, only part of the excess of the market over the shadow wage bill should be attributed to private sector capital. In addition, whenever some of the benefits of public investment are appropriated by owners of capital, the gross-of-tax return to capital will tend to overstate the genuine marginal product of capital. The overall implication is that the social discount rate may be less than the gross-of-tax rate of return to capital in the private sector even if public investment crowds out private investment dollar for dollar.

Suggested Citation

  • David F. Burgess, 1989. "The Social Opportunity Cost of Capital in the Presence of Labour Market Distortions," Canadian Journal of Economics, Canadian Economics Association, vol. 22(2), pages 245-262, May.
    • Handle: RePEc:cje:issued:v:22:y:1989:i:2:p:245-62
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    Cited by:

    1. Chiara Del Bo & Carlo Fiorio & Massimo Florio, 2011. "Shadow Wages for the EU Regions," Fiscal Studies, Institute for Fiscal Studies, vol. 32(1), pages 109-143, March.
    2. Abeer Al Yaqoobi & Marcel Ausloos, 2022. "An Intergenerational Issue: The Equity Issues due to Public-Private Partnerships. The Critical Aspect of the Social Discount Rate Choice for Future Generations," Papers 2201.09064, arXiv.org.
    3. Akbulut, Hale & Seçilmiş, Erdem, 2019. "Estimation of a social discount rate for Turkey," Socio-Economic Planning Sciences, Elsevier, vol. 67(C), pages 78-85.
    4. 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.

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