Principles and Standards for Benefit–Cost Analysis

Principles and Standards for Benefit–Cost Analysis

Edited by Scott O. Farrow and Richard Zerbe, Jr.

Benefit–cost analysis informs which policies or programs most benefit society when implemented by governments and institutions around the world. This volume brings together leading researchers and practitioners to recommend strategies and standards to improve the consistency and credibility of such analyses, assisting analysts of all types in achieving a greater uniformity of practice.

Chapter 7: Appropriate discounting for benefit–cost analysis

David F. Burgess and Richard O. Zerbe Jr.

Subjects: economics and finance, public sector economics, valuation


Perhaps no methodological question within benefit–cost analysis (BCA) has been so widely discussed as the discounting of future benefits and costs. The body of literature regarding this subject is vast. However, it is also unresolved. Little consensus can be found on issues such as what should be discounted, or on the choice of a discount rate. Sources of discrepancy include: (1) the effects of risk; (2) displacement of private capital; (3) rate of time preference; (4) whether rates should be hyperbolic with respect to the time period in which effects are felt (an issue related to the use of time preferences); (5) ethical issues such as whether the changing wealth of future generations should allow for rates that reflect preferences for income (a marginal utility of money that is different from those at the time the project is initiated) (Weitzman, 2001; Moore et al., 2004; Dasgupta, 2008) and (6) whether or not certain goods such as lives and health are special and should not be discounted. Part of the problem lies in the fact that proponents of different approaches to discounting are frequently unclear about what they are maximizing, or what function the discount rate is supposed to perform. In this chapter we take the position that the basic principles that underlie benefit–cost analysis should be carried forward with respect to discount rates.

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