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Opportunity Cost of Capital, Marginal Cost of Funds and Numeraires in Cost-Benefit Analysis

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  • Szekeres, Szabolcs

Abstract

The question of choice of social discount rate, which is related to the choice of numeraire in CBA, has been unsettled for decades. The solution lies in using both the social time preference rate (STPR) and the social opportunity cost rate (SOCR) simultaneously but in different roles. There are two proposed methods of using the two rates, however, one of which places a great emphasis on the marginal cost of funds (MCF). This paper explores the interaction between these concepts using a numerical example to show how the alternative discounting methods compare and how one of them works even if the SOCR differs from the rate of fall of the value of the possible numeraires.

Suggested Citation

  • Szekeres, Szabolcs, 2023. "Opportunity Cost of Capital, Marginal Cost of Funds and Numeraires in Cost-Benefit Analysis," MPRA Paper 118725, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:118725
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    References listed on IDEAS

    as
    1. David F. Burgess & Richard O. Zerbe, 2013. "Appropriate discounting for benefit–cost analysis," Chapters, in: Scott O. Farrow & Richard Zerbe, Jr. (ed.), Principles and Standards for Benefit–Cost Analysis, chapter 7, pages 247-263, Edward Elgar Publishing.
    2. Dreze, Jean & Stern, Nicholas, 1990. "Policy reform, shadow prices, and market prices," Journal of Public Economics, Elsevier, vol. 42(1), pages 1-45, June.
    3. 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.
    4. Szekeres, Szabolcs, 2022. "Answering the social discount rate question," MPRA Paper 115848, University Library of Munich, Germany.
    5. Spackman, Michael, 2020. "Social Discounting and the Cost of Public Funds: A Practitioner’s Perspective," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 11(2), pages 244-271, July.
    6. Burgess, David F. & Zerbe, Richard O., 2011. "Appropriate Discounting for Benefit-Cost Analysis," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 2(2), pages 1-20, April.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Social discount rate; STP discounting; SOC discounting; Descriptive discounting; Prescriptive discounting; Two-rate discounting; Shadow Price of Capital; Marginal Cost of Funds.;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

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