On the social rate of discount and price of capital in cost - benefit analysis

Questions relevant to the use of rate of time discount in evaluating the social profitability of an investment project are reviewed. Attention is paid to the underlying social welfare implications of cost-benefit analysis, including treatment of objectives other than aggregate efficiency. Unless the economy is investing at the optimal rate, the social discount rate cannot be inferred from either the market rate of interest or the marginal productivity of capital. Two conclusions emerge from this analysis when the rate of investment is not optimal: 1) the social discount rate cannot be estimated and must be taken as given exogenously; 2) changes in the level of investment induced by the project, through wage payments and use of capital expenditure funds, must be evaluated at the shadow price of investment. The evaluation procedures are limited to partial equilibrium techniques that measure the impact of a decision on all other aspects of the economy, and it is concluded that the criteria for public project selection should not be monetary profit, but social profit, as determined by these procedures.