Methodology - "“Just Give Me a Number!” Practical Values for the Social Discount Rate"

1304 Words Feb 1st, 2016 6 Pages
ECON 172 REPORT
METHODOLOGY

“What weights should society apply to cost and benefits occurring in future time periods relative to the present period?”

INTRAGENERATIONAL DISCOUNTING * Consumption rate of interest cum shadow price of capital method (CRI-SPC Method) * The level of public investment should be based on individual preference for present consumption vs. future consumption * The marginal rate of time preference * Investment is simply a means of using resources that are potentially available for consumption now in order to increase consumption later * Individuals typically have a positive rate of time preference * They demand compensation when forgoing present for future consumption * SDR
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Then the CRI-SPC method = Discounting at the ROI * But some if not all costs will displace consumption, thus this method is generally invalid * WSOC Method * SDR = weighted average of the CRI and the ROI * It will not give the same NPV as using the CRI-SPC method * Different rates of after-tax return and before tax marginal return to private investment

DISCOUNTING USING THE OPTIMAL GROWTH RATE METHOD (OGR METHOD) * First reason for rejecting CRI-SPC method: rejects the notion that social choices reflect individual preferences as inferred from market interest rates * Because capital markets are not perfect and individual consumers do not behave as assumed by the standard economic model of intertemporal choice * Not only do borrowing and lending rates differ due to taxes and transaction costs, but some individuals are screened out of legitimate credit markets altogether due to informational asymmetries * Individuals differ in both their rates of time preference and in their opportunities * Because many

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