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Reconciling alternative views about the appropriate social discount rate

Listed author(s):
  • Burgess, David F.

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.

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File URL: http://www.sciencedirect.com/science/article/pii/S0047272712000965
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Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 97 (2013)
Issue (Month): C ()
Pages: 9-17

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Handle: RePEc:eee:pubeco:v:97:y:2013:i:c:p:9-17
DOI: 10.1016/j.jpubeco.2012.08.009
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505578

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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.
  2. Sjaastad, Larry A & Wisecarver, Daniel L, 1977. "The Social Cost of Public Finance," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 513-547, June.
  3. Wildasin, David E, 1984. "On Public Good Provision with Distortionary Taxation," Economic Inquiry, Western Economic Association International, vol. 22(2), pages 227-243, April.
  4. David F. Burgess, 1988. "Complementarity and the Discount Rate for Public Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 103(3), pages 527-541.
  5. 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 887-899, December.
  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.
  7. Tatsuo Hatta, 1977. "A Theory of Piecemeal Policy Recommendations," Review of Economic Studies, Oxford University Press, vol. 44(1), pages 1-21.
  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.
  11. Bev Dahlby, 2008. "The Marginal Cost of Public Funds: Theory and Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262042509, January.
  12. Stephen A. Marglin, 1963. "The Opportunity Costs of Public Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 77(2), pages 274-289.
  13. Jones, Chris, 2005. "Applied Welfare Economics," OUP Catalogue, Oxford University Press, number 9780199281978.
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