Appropriate Discounting for Benefit-Cost Analysis

Burgess, David F.; Zerbe, Richard O.

doi:10.2202/2152-2812.1065

Cited by 47 publications

(31 citation statements)

References 39 publications

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“…However, taking into consideration other possible sources of public finance—specifically, foreign borrowing and forgone private consumption—does not empirically change the discount rate very much. A recent study based on a weighted average of the rates of returns from different sources yields discount rates ranging from 6 percent to 8 percent (Burgess & Zerbe, ).…”

Section: Specifying the Model's Parametersmentioning

confidence: 99%

Are Green Vehicles Worth the Extra Cost? The Case of Diesel‐Electric Hybrid Technology for Urban Delivery Vehicles

Krutilla¹,

Graham²

2012

J Policy Anal Manage

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A central question for environmental policy is whether the long‐term benefits of energy‐saving technologies are sufficient to justify their short‐term costs, and if so, whether financial incentives are needed to stimulate adoption. The fiscal effects of incentivizing new technologies, and the revenue effects of using the technology, are also policy relevant, given current fiscal constraints. This study evaluates the economic and fiscal effects of promoting diesel‐electric hybrid technology in urban delivery vehicles, an application supported by U.S. policymakers. An economic model is used to simulate the conditional probability density functions of the net present values (NPVs) of diesel electric hybrids annually from 2012 to 2030. The NPV time paths, which reflect fuel price, environmental, and technology trends, show the expected dates that hybrids become economically viable, and allow an evaluation of the net benefits of hybrid technology as an investment over the entire simulation horizon. The NPV distributions are computed for five stakeholder classes, including transportation firms, parties benefiting from reduced externality damages, state and local governments, and the larger society. The analysis shows that hybrid technology investment does not appear to be justified from a societal perspective at a 7 percent discount rate, but the probability for positive net returns increases substantially at a 3 percent rate.

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Section: Specifying the Model's Parametersmentioning

confidence: 99%

Are Green Vehicles Worth the Extra Cost? The Case of Diesel‐Electric Hybrid Technology for Urban Delivery Vehicles

Krutilla¹,

Graham²

2012

J Policy Anal Manage

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“…made in MASDR are largely a repetition of arguments previously found in Burgess and Zerbe (2011) and Burgess (2010Burgess ( , 2013, although MASDR also contains a number of specific points about MBV (2013) which we address later in this response.…”

mentioning

confidence: 63%

“…5 The increase in the interest rate will also increase saving somewhat, reducing current consumption, and it will appreciate the exchange rate and lower net exports, increasing foreign borrowing. In advocating a SDR of approximately 7%, Burgess and Zerbe (2011) assume that 54% of the project's borrowing is at the expense of private investment, 10% reduces consumption and 36% increases foreign borrowing. 6 Of course, this statement relies on the normative judgments implicit in the Kaldor-Hicks criterion (see footnote 3, supra).…”

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confidence: 99%

The choice of the social discount rate and the opportunity cost of public funds

Moore

Boardman

Vining

2013

J. Benefit Cost Anal.

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Abstract:The decades-old literature on the correct method for choosing and estimating a social discount rate (SDR) has resulted in two, largely opposing viewpoints. This note seeks to clarify the key sources of disagreement between these two camps. One view advocates that the choice should be based chiefly on the social opportunity cost of the return to foregone private capital investment (SOC), and suggests a SDR of around 7%. The other viewpoint, expressed by the authors, argues that the choice should be based on the social rate of time preference (STP), the rate at which society is willing to trade present for future consumption, suggesting a SDR of around 3.5%. Because of the fundamentally normative basis of the SDR choice, neither approach generates testable hypotheses that would allow falsification. For government project evaluation, the choice ultimately depends on the opportunity cost of public funds, which in turn depends on how fiscal policy actually operates. The STP approach contends that governments set targets for deficits and public debt, so that a marginal government project will be tax-financed, largely crowding out current consumption. The SOC belief is that governments set revenue targets, so that any government project will be deficit-financed on the margin, which will largely crowd out private investment. The authors also argue that a SDR based on the STP approach is appropriate for: benefit-cost analysis of government regulations, self-financing government projects, and government cost-effectiveness studies.

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“…As noted by Burgess and Zerbe [2011], the literature on the discount rate in benefitcost analysis is vast and apparently unresolved. Fortunately, some of the sources of disagreement are not relevant to the years 1817−1880.…”

Section: Choice Of Discount Ratementioning

confidence: 99%

Benefits and Costs of the Erie Canal: A New View

Vitaliano

2016

Eastern Econ J

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Appropriate Discounting for Benefit-Cost Analysis

Cited by 47 publications

References 39 publications

Are Green Vehicles Worth the Extra Cost? The Case of Diesel‐Electric Hybrid Technology for Urban Delivery Vehicles

Are Green Vehicles Worth the Extra Cost? The Case of Diesel‐Electric Hybrid Technology for Urban Delivery Vehicles

The choice of the social discount rate and the opportunity cost of public funds

Benefits and Costs of the Erie Canal: A New View

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