On the Social Rate of Discount

William Baumol

Chapter 2 in Classic Papers in Natural Resource Economics, 1974, pp 37-53 from Palgrave Macmillan

Abstract: Abstract Few topics in our discipline rival the social rate of discount as a subject exhibiting simultaneously a very considerable degree of knowledge and a very substantial level of ignorance. Economists understand thoroughly just what this variable should measure: the opportunity cost of postponement of receipt of any benefit yielded by a public investment. They agree also on the components that should be considered in making up this figure: primarily the welfare foregone by not having these benefits available for immediate consumption or reinvestment and (perhaps) a premium corresponding to the risk incurred in undertaking government projects. Above all, economists are quite generally in accord on the view that a very serious misallocation of resources can result from the use of an incorrect estimate of the value of this variable in a cost-benefit calculation. Yet, while they agree that exernalities can play a significant role in the matter, there is some considerable question even about the direction of these effects. There is substantial obscurity and divergence of views in discussions of the implications of differences (if indeed there are any) in the degree of risk that is incurred when a given project is undertaken by a private firm on the one side and by government on the other.

Keywords: Discount Rate; Opportunity Cost; Risk Premium; Public Investment; Government Bond (search for similar items in EconPapers)
Date: 1974
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DOI: 10.1057/9780230523210_3

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