Working Paper: NBER ID: w22579
Authors: Nicholas Z. Muller
Abstract: Most developed economies invest in public goods such as national defense, education, infrastructure, and the environment. Expenditures on public projects entail a diversion of funds away from investments in private capital. Discount rates used to evaluate such projects should reflect the rate of return on the current mix of investment opportunities. The present paper derives discount rates using an augmented measure of national income inclusive of non-market goods. The discount rate reflects three key factors: the productivity of private capital, the opportunity cost of direct expenditure on public projects, and the returns to public investment that accrete outside of the market boundary. The difference between this social rate and the market rate depends on the latter two factors. In the first empirical calculation of discount rates in this setting, the paper reports that, in the U.S. economy, the difference between augmented and market discount rates amounts to 1.24 percent from 1999 to 2002 and under 1 percent from 2002 to 2011.
Keywords: discount rates; national income; public goods; environmental quality; nonmarket goods
JEL Codes: H23; H43; Q51; Q53; Q56
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| augmented discount rate (E43) | lower than market rate (E43) |
| environmental damages (Q53) | augmented discount rate (E43) |
| public expenditure on abatement (H76) | economic output (E23) |
| environmental quality (Q50) | economic measures of growth (E01) |
| efficient pollution control (Q52) | augmented discount rate equals market rate (E43) |
| rising damages (Q54) | drag on augmented growth (O49) |
| falling damages (K13) | augmented discount rate exceeds market rate (E43) |