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Reconciling alternative views about the appropriate social discount rate

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  • Burgess, David F.

Abstract

This paper shows that, in an economy with an exogenous rate of return and a given capital income tax distortion, and with lump sum taxes as the marginal tax instrument, the SOC and MCF criteria both correctly identify all worthwhile projects if the criteria are properly applied. The equivalence between the SOC and MCF criteria continues to hold i) if distortionary taxes are used to balance the budget, and ii) if the rate of return to capital is endogenous. Apparent differences between the SOC and MCF criteria arise from different definitions of a project's indirect revenue effect. Neither criterion has an implementation advantage because the information requirements for each are identical.

Suggested Citation

  • Burgess, David F., 2013. "Reconciling alternative views about the appropriate social discount rate," Journal of Public Economics, Elsevier, vol. 97(C), pages 9-17.
  • Handle: RePEc:eee:pubeco:v:97:y:2013:i:c:p:9-17
    DOI: 10.1016/j.jpubeco.2012.08.009
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    References listed on IDEAS

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    1. 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.
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    6. Charles L. Ballard & Don Fullerton, 1992. "Distortionary Taxes and the Provision of Public Goods," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 117-131, Summer.
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    8. Peter Diamond, 1968. "The Opportunity Costs of Public Investment: Comment," The Quarterly Journal of Economics, Oxford University Press, vol. 82(4), pages 682-688.
    9. Liu, Liqun, 2003. "A marginal cost of funds approach to multi-period public project evaluation: implications for the social discount rate," Journal of Public Economics, Elsevier, vol. 87(7-8), pages 1707-1718, August.
    10. Chris Jones, 2005. "Why the Marginal Social Cost of Funds is not the Shadow Value of Government Revenue," ANU Working Papers in Economics and Econometrics 2005-449, Australian National University, College of Business and Economics, School of Economics.
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    13. Jones, Chris, 2005. "Applied Welfare Economics," OUP Catalogue, Oxford University Press, number 9780199281978.
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    Citations

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    Cited by:

    1. David F. Burgess & Richard O. Zerbe, 2013. "Appropriate discounting for benefit–cost analysis," Chapters,in: Principles and Standards for Benefit–Cost Analysis, chapter 7, pages 247-263 Edward Elgar Publishing.
    2. Glenn P. Jenkins & Armin Zeinali, 2014. "Cost-Effective Infrastructure Choices In Education: Location, Build Or Repair," Development Discussion Papers 2013-08, JDI Executive Programs.
    3. Frits Bos & Thomas van der Pol & Gerbert Romijn, 2018. "Should CBA’s include a correction for the marginal excess burden of taxation?," CPB Discussion Paper 370, CPB Netherlands Bureau for Economic Policy Analysis.
    4. Burgess, David F. & Zerbe, Richard O., 2013. "The most appropriate discount rate," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 4(03), pages 391-400, December.
    5. Moore, Mark A. & Boardman, Anthony E. & Vining, Aidan R., 2013. "The choice of the social discount rate and the opportunity cost of public funds," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 4(03), pages 401-409, December.

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    Keywords

    Social discount rate; Project evaluation;

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