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Identifying an Australian ‘Shadow’ Benefit / Cost Ratio for Public Projects

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  • Lawrence, Craig

Abstract

This paper examines the social opportunity cost of a hypothetical public project in Australia and compares these values with the cost of the project as measured by factor prices. Since 2001, the Australian taxation system has included an ad valorem tax, the Goods and Services Tax, however relatively little analysis of the impact of this tax on public project evaluation methods has been undertaken. This tax creates divergences between social opportunity cost and conventional cost measures. Therefore it is recommended that shadow prices be applied to pubic projects. Following Campbell (1975), a shadow price can be introduced into Australian project evaluation in the form of a cut-off benefit cost ratio. The calculations reported on in the paper indicate that this ratio lies between 1 and 1.3 for public projects in Australia.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13481.

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Date of creation: 11 Feb 2009
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Handle: RePEc:pra:mprapa:13481

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Keywords: allocative efficiency; cost benefit analysis; efficiency; optimal taxation; project evaluation; social discount rate;

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  1. Harry F. Campbell, 1975. "A Benefit/Cost Rule for Evaluating Public Projects in Canada," Canadian Public Policy, University of Toronto Press, vol. 1(2), pages 171-175, Spring.
  2. Campbell, Harry F. & Brown, Richard P.C., 2005. "A multiple account framework for cost-benefit analysis," Evaluation and Program Planning, Elsevier, vol. 28(1), pages 23-32.
  3. John Creedy, 2007. "Discounting and the Social Time Preference Rate," Department of Economics - Working Papers Series 989, The University of Melbourne.
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