Benefit-Cost Analysis: Financial and Economic Appraisal Using Spreadsheets

By Harry F. Campbell; Richard P. C. Brown | Go to book overview

10
The Social Discount Rate, Cost of Public Funds,
and the Value of Information

Introduction

In this Chapter we consider three issues each of which may call for a modification of the following simple net present value rule: in the absence of risk, undertaking any project with a positive net present value (NPV), calculated using the appropriate shadow-prices and discounting at the market rate of interest, will contribute to economic efficiency.

Firstly, the concept of social time preference reflects the view that the market rate of interest does not accurately reflect society's preference for present as opposed to future consumption, and that a discount rate based on a social time preference rate should be used to calculate NPVs from a public interest viewpoint. For reasons which will be discussed below, the social time preference rate is usually judged to be lower than the market rate of interest.

Secondly, the concept of social opportunity cost is based on the notion that, because of tax-induced distortions to the pattern of resource allocation, the opportunity cost to the economy of raising public funds for government expenditures is higher than the nominal amount raised. This suggests that a public project should have a present value of benefits sufficiently large not only to offset project costs (the NPV>0 rule), but also to offset the premium on the cost of public funds if the project is to make a net contribution to efficiency.

Thirdly, the fact that a project has a NPV>0 does not necessarily imply that now is the most efficient time to implement it. Because additional information about the project variables – prices, costs etc. – may accrue in the future there could be an advantage to keeping open the option of undertaking the project. Once this option has been exercised it ceases to have any value, and the loss of option value should be taken into account in the decision to proceed.


The Social Rate of Discount

It was argued earlier that the main rationale for social benefit-cost analysis is the existence of market failure. Because of distortions and ill-defined property rights, the actions of private agents operating through the market will not necessarily result in an efficient allocation of resources, thereby creating a possible role for government in the scrutiny and regulation of proposed private projects and the undertaking of public projects. A conspicuous, but unavoidable, market failure is the absence of future generations in the capital markets which determine the quantity of resources to be allocated now to investment to provide consumption goods for the future. If the needs of future generations are not adequately taken into

-221-

Notes for this page

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this book

This book has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this book

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this page

Cited page

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited page

Bookmark this page
Benefit-Cost Analysis: Financial and Economic Appraisal Using Spreadsheets
Table of contents

Table of contents

Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this book

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen
/ 345

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.