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Government discounting controversies: changing prices, opportunity costs and systematic risk

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  • Michael Spackman
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    Abstract

    The conceptual basis and numerical quantification of the time discount rate (or rates) to use for public sector analysis have been debated for over half a century. This paper addresses those aspects that are in principle amenable to formal analysis, with minimal need for judgements about ethics or administrative practicability. These include controversies, many of them very long lasting, about the discounting of quantities measured in the numeraire of marginal utility, about the opportunity cost of public capital and current spending, and about the relevance of equity risk premia to government appraisal. It is concluded that, while current UK government practice in these respects is sound, some positions that are still supported widely elsewhere do not stand up to close examination, but are likely to continue to be held as matters of faith.

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    File URL: http://www.lse.ac.uk/GranthamInstitute/publications/WorkingPapers/Papers/60-69/WP67_government-discounting-controversies_1.pdf
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    Bibliographic Info

    Paper provided by Grantham Research Institute on Climate Change and the Environment in its series Grantham Research Institute on Climate Change and the Environment Working Papers with number 67.

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    Date of creation: Nov 2011
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    Handle: RePEc:lsg:lsgwps:wp67

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    1. Feldstein, Martin S, 1970. "Choice of Technique in the Public Sector: A Simplification," Economic Journal, Royal Economic Society, vol. 80(323), pages 985-90, December.
    2. Paul A. Grout, 2003. "Public and Private Sector Discount Rates in Public-Private Partnerships," Economic Journal, Royal Economic Society, vol. 113(486), pages C62-C68, March.
    3. Partha Dasgupta, 2008. "Discounting climate change," Journal of Risk and Uncertainty, Springer, vol. 37(2), pages 141-169, December.
    4. Klein, Michael, 1997. "The Risk Premium for Evaluating Public Projects," Oxford Review of Economic Policy, Oxford University Press, vol. 13(4), pages 29-42, Winter.
    5. Emmett B. Keeler & Shan Cretin, 1983. "Discounting of Life-Saving and Other Nonmonetary Effects," Management Science, INFORMS, vol. 29(3), pages 300-306, March.
    6. Lind, Robert C., 1990. "Reassessing the government's discount rate policy in light of new theory and data in a world economy with a high degree of capital mobility," Journal of Environmental Economics and Management, Elsevier, vol. 18(2), pages S8-S28, March.
    7. Jones-Lee, Michael W & Loomes, Graham, 1995. "Discounting and Safety," Oxford Economic Papers, Oxford University Press, vol. 47(3), pages 501-12, July.
    8. Hugh Gravelle & Werner Brouwer & Louis Niessen & Maarten Postma & Frans Rutten, 2007. "Discounting in economic evaluations: stepping forward towards optimal decision rules," Health Economics, John Wiley & Sons, Ltd., vol. 16(3), pages 307-317.
    9. Karl Claxton & Mike Paulden & Hugh Gravelle & Werner Brouwer & Anthony J. Culyer, 2011. "Discounting and decision making in the economic evaluation of health‐care technologies," Health Economics, John Wiley & Sons, Ltd., vol. 20(1), pages 2-15, January.
    10. Hugh Gravelle & Dave Smith, 2001. "Discounting for health effects in cost-benefit and cost-effectiveness analysis," Health Economics, John Wiley & Sons, Ltd., vol. 10(7), pages 587-599.
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