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The social discount rate in cost benefit analysis: the British experience and lessons to be learned

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  • Erhun KULA

Abstract

Application of the social discount rate to public sector projects is one of the most crucial parameters in cost benefit analysis. Because of its importance some countries have a formal discount rate and method of discounting policies. The United Kingdom was one of the earliest to adopt a policy on discounting which started in 1967 and it is still evolving. This paper looks at the evolution of the British discounting policy with a number of constructive critical remarks focussing on the magnitude of the current rate as well as the method of discounting. It concludes that present 3. 5% figure is rather low and discounting by using the declining rate is almost totally ineffective to care for future generations as compared with an alternative modified discounting which treats all generations in the same manner

Suggested Citation

  • Erhun KULA, 2006. "The social discount rate in cost benefit analysis: the British experience and lessons to be learned," Departmental Working Papers 2006-19, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    • Handle: RePEc:mil:wpdepa:2006-19
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    References listed on IDEAS

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    4. Robert M. Solow, 1974. "The Economics of Resources or the Resources of Economics," Palgrave Macmillan Books, in: Chennat Gopalakrishnan (ed.), Classic Papers in Natural Resource Economics, chapter 12, pages 257-276, Palgrave Macmillan.
    5. Gollier, Christian, 2002. "Time Horizon and the Discount Rate," Journal of Economic Theory, Elsevier, vol. 107(2), pages 463-473, December.
    6. David Evans & Haluk Sezer, 2004. "Social discount rates for six major countries," Applied Economics Letters, Taylor & Francis Journals, vol. 11(9), pages 557-560.
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    Cited by:

    1. Dmytro Osiichuk & Paweł Wnuczak, 2020. "Aplikacja koncepcji zarządzania wartością VBM w publicznych instytucjach kultury," Studia z Polityki Publicznej / Public Policy Studies, Warsaw School of Economics, vol. 7(3), pages 1-18.
    2. Pálinkó, Éva & Szabó, Márta, 2012. "Application of Social Discount Rate in Public Projects," Public Finance Quarterly, Corvinus University of Budapest, vol. 57(2), pages 184-199.

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    Keywords

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    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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