- Elgar original reference
Edited by Robert J. Brent
Chapter 14: Project Finance and Cost–Benefit Analysis
Peggy B. Musgrave 1 Introduction This chapter examines the proposition that the choice of financing public projects significantly affects the outcome of their cost–benefit evaluations. Both tax and loan finance are considered. For theoretical discussion of the essential components of cost–benefit analysis such as the appropriate discount rate, shadow pricing, the opportunity cost of real inputs and the estimation of real benefits, the reader is referred to other chapters in this volume and to Layard (1972), Drèze and Stern (1987), Layard and Glaister (1994), and Brent (2007). The theoretical framework for cost–benefit analysis has developed through many writings that usually did not explicitly include the costs and benefits of the financial flows associated with the project but tended to concentrate on the real benefits and opportunity costs of the resource inputs. Attention was focused on the choice of discount rate to allow for ancillary welfare effects often in a second-best world.1 Feldstein (1974), on the other hand, suggested an algorithm for project evaluation which allowed explicitly for the benefits and costs of the money flows associated with the project valued in their ‘consumption equivalent’ form, while proposing the private rate of time preference as the appropriate social rate of time preference, or social rate of discount, an assumption followed here. We begin with a full employment economy with price stability, a customary assumption in the application of cost–benefit analysis. Markets are largely competitive though they may be distorted by the presence of taxes. Financial markets...
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