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Removing Some Dissonance From the Social Discount Rate Debate

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Author Info
David Burgess (University of Western Ontario)

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Abstract

In 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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Paper provided by University of Western Ontario, RBC Financial Group Economic Policy Research Institute in its series University of Western Ontario, RBC Financial Group Economic Policy Research Institute Working Papers with number 20082.

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Date of creation: 2008
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Handle: RePEc:uwo:epuwoc:20082

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Postal: RBC Financial Group Economic Policy Research Institute, Social Science Centre, University of Western Ontario, London, Ontario, Canada N6A 5C2
Phone: 519-661-2111 Ext.85228
Web page: http://economics.uwo.ca/econref/WorkingPapers/

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Courant, Paul N. & Porter, Richard C., 1981. "Averting expenditure and the cost of pollution," Journal of Environmental Economics and Management, Elsevier, vol. 8(4), pages 321-329, December. [Downloadable!] (restricted)
  2. Burgess, David F, 1988. "Complementarity and the Discount Rate for Public Investment," The Quarterly Journal of Economics, MIT Press, vol. 103(3), pages 527-41, August. [Downloadable!] (restricted)
  3. Sandmo, Agnar & Dreze, Jacques H, 1971. "Discount Rates for Public Investment in Closed and Open Economies," Economica, London School of Economics and Political Science, vol. 38(152), pages 395-412, November. [Downloadable!] (restricted)
  4. Wildasin, David E, 1984. "On Public Good Provision with Distortionary Taxation," Economic Inquiry, Oxford University Press, vol. 22(2), pages 227-43, April.
  5. Browning, Edgar K, 1987. "On the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 77(1), pages 11-23, March. [Downloadable!] (restricted)
  6. Dreze, Jacques H, 1974. "Discount Rates and Public Investment: A Post-Scriptum," Economica, London School of Economics and Political Science, vol. 41(161), pages 52-61, February. [Downloadable!] (restricted)
  7. Bradford, David F, 1975. "Constraints on Government Investment Opportunities and the Choice of Discount Rate," American Economic Review, American Economic Association, vol. 65(5), pages 887-99, December. [Downloadable!] (restricted)
  8. Ballard, Charles L & Fullerton, Don, 1992. "Distortionary Taxes and the Provision of Public Goods," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 117-31, Summer. [Downloadable!] (restricted)
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  9. Bartik, Timothy J., 1988. "Evaluating the benefits of non-marginal reductions in pollution using information on defensive expenditures," Journal of Environmental Economics and Management, Elsevier, vol. 15(1), pages 111-127, March. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Glenn Jenkins & Chun-Yan Kuo, 2007. "The Economic Opportunity Cost of Capital for Canada - An Empirical Update," Development Discussion Papers 1, JDI Executive Programs. [Downloadable!]
    Other versions:
  2. Glenn Jenkins & CHUN-YAN KUO & JOHN GIRALDEZ, 2007. "Canadian Regulatory Cost-Benefit Analysis Guide," Development Discussion Papers 2007-3, JDI Executive Programs. [Downloadable!]
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