The Structural Funds of the European Union
Edited by Massimo Florio
Chapter 11: Social Discount Rates for the European Union: An Overview
Michael Spackman INTRODUCTION It is standard practice in project or policy analysis to discount costs and beneﬁts over time, usually at a constant percentage rate per year. A private sector company discounts projected company expenditures and often revenues. The public sector usually discounts public spending, and sometimes consumption, or other welfare impacts valued in consumption equivalent values. In the private sector the discount rate is based on the cost of capital for the activity in question. The cost of capital is the rate of return required by ﬁnanciers (adjusted as appropriate for taxes). The private sector cost of capital is the weighted average cost of the relevant debt and equity ﬁnancing. The government cost of capital is the market cost of government borrowing. In government however the cost of capital does not (except in the model described below as the eﬃcient markets hypothesis model) deﬁne the social discount rate. This chapter reviews the main conceptual approaches to the social discount rate. It is not concerned with the concept described in EC guidance as the ﬁnancial discount rate for publicly supported commercial projects.1 This chapter reviews in the second section the three most frequently promoted conceptual frameworks for social discounting. The third section examines the quantiﬁcation, from a welfare economics perspective, of social time preference, following the approach recommended for cost–beneﬁt analysis in EU guidance. The fourth and ﬁfth sections review the issues of discounting over the very long term and of comparing public and...
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