Opportunity Cost of Capital, Marginal Cost of Funds and Numeraires in Cost-Benefit Analysis

Szekeres, Szabolcs (2023): Opportunity Cost of Capital, Marginal Cost of Funds and Numeraires in Cost-Benefit Analysis.

Abstract

The question of choice of social discount rate, which is related to the choice of numeraire in CBA, has been unsettled for decades. The solution lies in using both the social time preference rate (STPR) and the social opportunity cost rate (SOCR) simultaneously but in different roles. There are two proposed methods of using the two rates, however, one of which places a great emphasis on the marginal cost of funds (MCF). This paper explores the interaction between these concepts using a numerical example to show how the alternative discounting methods compare and how one of them works even if the SOCR differs from the rate of fall of the value of the possible numeraires.

• Item Type: MPRA Paper
• Language: English
• Keywords: Social discount rate; STP discounting; SOC discounting; Descriptive discounting; Prescriptive discounting; Two-rate discounting; Shadow Price of Capital; Marginal Cost of Funds.
• Subjects: D - Microeconomics > D6 - Welfare Economics > D61 - Allocative Efficiency ; Cost-Benefit Analysis; H - Public Economics > H4 - Publicly Provided Goods > H43 - Project Evaluation ; Social Discount Rate

References

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Szekeres, Szabolcs (2022) “Answering the social discount rate question,” MPRA Paper No. 115848. https://mpra.ub.uni-muenchen.de/117718/

Szekeres, Szabolcs (2023) “The simple answer to the Social Discount Rate question” MPRA Paper No. 117843. https://mpra.ub.uni-muenchen.de/117843/ (Request an updated version by email: [e-mail])