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

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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 = rate of time preference * If the future increase in net benefits > present costs (via consumption rate of interest, CRI) = project passes a potential compensation test * Possible for the winners to compensate the losers * Still have sufficient gains to allow for pareto efficiency * Ex. Net return available to individual savers is 2% per year
Project cost (to taxpayers) = $1M this year
Net benefit = $3.2M in 50 years * forgoing current consumption of $1M and lending at 2%, return = $2.72M in 50 yrs * therefore, the $3.2M benefit will be preferred * If we ignore intragenerational redistributions, we can suggest that this project would improve social welfare * If individuals seek to maximize their own well-being (economic theory), then marginal rate of time preference = rate at which they can trade present for future consumption (or vice versa) * From a societal perspective, resources that go into investment are worth more than those that are currently consumed * Ex. $1M is saved and invested today, after-tax marginal return to savings is 2%, but the before-tax marginal return to

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