Determining the Discount Rate for Government Projects

Louise Young ()
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Louise Young: The Treasury, https://treasury.govt.nz/

No 02/21, Treasury Working Paper Series from New Zealand Treasury

Abstract: Discount rates are widely used in the public sector to assess policy proposals where costs and benefits accrue over long time periods. Socially optimal policy choices require an appropriate choice of discount rate. This paper assesses the applicability of the two key theoretical approaches to selecting discount rates in the public sector. The two key theoretical approaches considered are the social rate of time preference and the social opportunity cost. Estimation issues in determining the rate using these two approaches are reviewed. The social rate of time preference is considered to be the appropriate approach. When estimates of the social rate of time preference are unavailable or clearly unreliable and the Government is considering financing a project, the social opportunity cost should be used. The social opportunity cost can be used as a proxy for the social rate of time preference. The paper presents an example using the capital asset pricing model in a weighted average cost of capital formula to determine a social opportunity cost.

Keywords: Discount rate; Social opportunity cost; Social rate of time preference (search for similar items in EconPapers)
JEL-codes: H4 H43 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2002-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:nzt:nztwps:02/21

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