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The social discount rate in cost benefit analysis: the British experience and lessons to be learned

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  • Erhun KULA

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    Abstract

    Application of the social discount rate to public sector projects is one of the most crucial parameters in cost benefit analysis. Because of its importance some countries have a formal discount rate and method of discounting policies. The United Kingdom was one of the earliest to adopt a policy on discounting which started in 1967 and it is still evolving. This paper looks at the evolution of the British discounting policy with a number of constructive critical remarks focussing on the magnitude of the current rate as well as the method of discounting. It concludes that present 3. 5% figure is rather low and discounting by using the declining rate is almost totally ineffective to care for future generations as compared with an alternative modified discounting which treats all generations in the same manner

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    File URL: http://wp.demm.unimi.it/tl_files/wp/2006/DEMM-2006_019wp.pdf
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    Bibliographic Info

    Paper provided by Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano in its series Departmental Working Papers with number 2006-19.

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    Date of creation: 13 Oct 2006
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    Handle: RePEc:mil:wpdepa:2006-19

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    Keywords: Cost-Benefit Analysis; Discounting; Future Generations;

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    1. David Evans & Haluk Sezer, 2004. "Social discount rates for six major countries," Applied Economics Letters, Taylor & Francis Journals, vol. 11(9), pages 557-560.
    2. Gollier, Christian, 2002. "Time Horizon and the Discount Rate," Journal of Economic Theory, Elsevier, vol. 107(2), pages 463-473, December.
    3. Solow, Robert M, 1974. "The Economics of Resources or the Resources of Economics," American Economic Review, American Economic Association, vol. 64(2), pages 1-14, May.
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