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The Economic Opportunity Cost Of Capital For Canada - An Empirical Update

Author

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  • Chun-Yan Kuo

    (Queen's University, Canada)

  • Glenn Jenkins

Abstract

The social or economic discount rate is the threshold rate used to calculate the net present value of an investment project, a program or a regulatory intervention to see whether the proposed expenditures are economically worthwhile to undertake. The size of the economic rate of discount has been a policy issue in Canada for many years. The debate has been primarily concerned with the empirical measurement of the economic opportunity cost of funds. The purpose of this paper is to reexamine and update the empirical estimation of what is the appropriate economic discount rate for Canada. The results suggest that estimates of the economic discount rate can range from 7.78 percent to 8.39 percent real. As a consequence, we conclude that for Canada an 8 percent real rate is an appropriate discount rate to use when calculating the economic net present value of the flows of economic benefits and costs over time.

Suggested Citation

  • Chun-Yan Kuo & Glenn Jenkins, 2007. "The Economic Opportunity Cost Of Capital For Canada - An Empirical Update," Working Paper 1133, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:1133
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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.
    2. Arnold C. Harberger, 1972. "On Measuring the Social Opportunity Cost of Public Funds," Palgrave Macmillan Books, in: Project Evaluation, chapter 0, pages 94-122, Palgrave Macmillan.
    3. Glenn Jenkins & JOHN EVANS, 1980. "The Cost Of U.S. Direct Foreign Investment," Development Discussion Papers 1980-01, JDI Executive Programs.
    4. Chun‐Yan Kuo & Glenn P. Jenkins & M. Benjamin Mphahlele, 2003. "The Economic Opportunity Cost Of Capital In South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 71(3), pages 523-543, September.
    5. Harberger, Arnold C & Wisecarver, Daniel L, 1977. "Private and Social Rates of Return to Capital in Uruguay," Economic Development and Cultural Change, University of Chicago Press, vol. 25(3), pages 411-445, April.
    6. Boskin, Michael J, 1978. "Taxation, Saving, and the Rate of Interest," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages 3-27, April.
    7. Glenn P. Jenkins, 1981. "The Public-Sector Discount Rate for Canada: Some Further Observations," Canadian Public Policy, University of Toronto Press, vol. 7(3), pages 399-407, Summer.
    8. 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.
    9. Danny M. Leipziger, 1974. "Capital Movements and Economic Policy: Canada Under a Flexible Rate," Canadian Journal of Economics, Canadian Economics Association, vol. 7(1), pages 59-74, February.
    10. David Burgess, 2008. "Removing Some Dissonance From the Social Discount Rate Debate," University of Western Ontario, Economic Policy Research Institute Working Papers 20082, University of Western Ontario, Economic Policy Research Institute.
    11. David F. Burgess, 1981. "The Social Discount Rate for Canada: Theory and Evidence," Canadian Public Policy, University of Toronto Press, vol. 7(3), pages 383-394, Summer.
    12. Glenn Jenkins, 1973. "The Measurement Of Rates Of Return And Taxation From Private Capital In Canada," Development Discussion Papers 1973-02, JDI Executive Programs.
    13. Michael J. Boskin, 1978. "Taxation, Saving, and the Rate of Interest," NBER Chapters, in: Research in Taxation, pages 3-27, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Coppola, Andrea & Fernholz, Fernando & Glenday, Graham, 2014. "Estimating the economic opportunity cost of capital for public investment projects : an empirical analysis of the Mexican case," Policy Research Working Paper Series 6816, The World Bank.
    2. 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.
    3. Majid Hashemi & Glenn Jenkins & Frank Milne, 2023. "Renewable Energy Support Through Feed-in Tariffs: A Retrospective Stakeholder Analysis," Working Paper 1514, Economics Department, Queen's University.
    4. Alan C. O'Connor & Albert N. Link & Brandon M. Downs & Laura M. Hillier, 2015. "The impact of public investment in medical imaging technology: an interagency collaboration in evaluation," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 24(5), pages 510-531, July.
    5. John Lester, 2018. "Business Subsidies in Canada: Comprehensive Estimates for the Government of Canada and the Four Largest Provinces," SPP Research Papers, The School of Public Policy, University of Calgary, vol. 11(1), January.
    6. Stephanie MacLeod & Yves Filion, 2012. "Issues and Implications of Carbon-Abatement Discounting and Pricing for Drinking Water System Design in Canada," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 26(1), pages 43-61, January.
    7. Branker, K. & Pearce, J.M., 2010. "Financial return for government support of large-scale thin-film solar photovoltaic manufacturing in Canada," Energy Policy, Elsevier, vol. 38(8), pages 4291-4303, August.
    8. Hashemi, Majid & Jenkins, Glenn & Milne, Frank, 2023. "Rooftop solar with net metering: An integrated investment appraisal," Renewable and Sustainable Energy Reviews, Elsevier, vol. 188(C).
    9. Ferede, Ergete & Dahlby, Bev, 2012. "The Impact of Tax Cuts on Economic Growth: Evidence From the Canadian Provinces," National Tax Journal, National Tax Association;National Tax Journal, vol. 65(3), pages 563-594, September.
    10. Abdallah Othman & Glenn P. Jenkins & Mikhail Miklyaev, 2022. "Estimation of Economic Opportunity Cost of Capital: An Operational Guide for Mozambique," Development Discussion Papers 2022-04, JDI Executive Programs.

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    More about this item

    Keywords

    discount rates; opportunity cost; project evaluation;
    All these keywords.

    JEL classification:

    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

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