Rules for correctly dealing with price and interest rate projections when one conducts benefit-cost analysis during inflation are derived. Recommendations of the Water Resources Council and those adopted in the Water Resources Development Act of 1974 are critiqued. The use of real prices and real opportunity cost interest rates is recommended as an improvement over the present practice of employing real prices and nominal financial interest rates.The current inflation in the United States, one of the most severe since the turn of the century, has stimulated a great deal of debate among academic, business, and government economists.. This debate has centered on the causes of this inflation, its consequences, and its cures. Our concern in this paper is not with these issues but rather with the proper approach to be used when benefit-cost analyses of water resource projects are to be pdrformed using data which reflect expected inflation.A survey of the benefit-cost literature reveals that the problems associated with project evaluation during inflation have been largely neglected or incorrectly handled. Such classics in the water resources field as Eckstein [1958] and Krutilla and Eckstein [1958] did not mention the problem. In most of the more well-known recent literature the analytical and practical issues surrounding evaluation for periods of inflation have remained conspicuously absent [see Harberger et al., 1972; Haveman et al., 1974; Little and Mirrlees, 1968; Mishan, 1971; Niskanen et al., 1973]. When inflation has been discussed, it has often been analyzed improperly [Hirshleifer et al., 1960; McKean, 1958; Posner, 1972; Stocktisch, 1969; Federal Register, 1973]. Howe's [1971] book in the water resources field and Hirshleifer's [1970] theoretical analysis of capital theory are particularly noteworthy as they correctly, although briefly, discuss the problems of evaluating projects during inflation.The purposes of this paper are to clarify the issues associated with evaluating projects when data which incorporate expectations of inflation are used and to present some recommendations for improving the evaluation of federal water projects. First, we present the principles for conducting evalua-Stocktisch, J. A., Measuring the 9pportunity cost of government investments, Res.
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