Removing Some Dissonance From the Social Discount Rate Debate
AbstractIn an economy with a capital income tax distortion, the social discount rate (SDR) should reflect the social opportunity cost of capital rather than the social rate of time preference (consumption rate of interest) to ensure that public investments can produce Pareto improvements. The marginal cost of funds may exceed unity for a lump sum tax, but it is irrelevant for project evaluation. Even if a social welfare improvement is judged to be possible without passing the compensation test, the SDR should still reflect the social opportunity cost of capital to ensure that the project is the most efficient use of public funds.
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Bibliographic InfoPaper provided by University of Western Ontario, Economic Policy Research Institute in its series University of Western Ontario, Economic Policy Research Institute Working Papers with number 20082.
Date of creation: 2008
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