Identifying an Australian 'Shadow' Benefit / Cost Ratio for Public Projects

Lawrence, C (2009): Identifying an Australian 'Shadow' Benefit / Cost Ratio for Public Projects.

Abstract

This paper examines the social opportunity cost of a hypothetical public project in Australia and compares these values with the cost of the project as measured by factor prices. Since 2001, the Australian taxation system has included an ad valorem tax, the Goods and Services Tax, however relatively little analysis of the impact of this tax on public project evaluation methods has been undertaken. This tax creates divergences between social opportunity cost and conventional cost measures. Therefore it is recommended that shadow prices be applied to pubic projects. Following Campbell (1975), a shadow price can be introduced into Australian project evaluation in the form of a cut-off benefit cost ratio. The calculations reported on in the paper indicate that this ratio lies between 1 and 1.3 for public projects in Australia.

• Item Type: MPRA Paper
• Language: English
• Keywords: allocative efficiency, cost benefit analysis, efficiency, optimal taxation, project evaluation, social discount rate
• Subjects: H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency ; Optimal Taxation; H - Public Economics > H4 - Publicly Provided Goods > H43 - Project Evaluation ; Social Discount Rate; D - Microeconomics > D6 - Welfare Economics > D61 - Allocative Efficiency ; Cost-Benefit Analysis

References

[1] Bureau of Transport Economics (1999) Facts and Furphies in Cost Benefit Analysis: Transport, Report 100, AusInfo, ISBN 0-642-42239-7

[2] Campbell, H.F. (1975) ‘A Benefit/Cost Rule for Evaluating Public Projects in Canada’, Canadian Public Policy, Spring 1975, pp.171-5.

[3] Campbell, H.F. and Brown, R.P.C. (2003) ‘A Multiple Account Framework for Cost- Benefit Analysis’, Discussion Paper No. 328, June 2003, ISSN 1446-5523

[4] Creedy, J. (2007) ‘Discounting and the Social Time Preference Rate’, Research Paper Number 989, March 2007, Department of Economics, University of Melbourne

[5] HM Treasury (2003) The Green Book: Appraisal and Evaluation in Central Government, Second Edition

[6] Joice, V. and Prado, J.M. (2006) Social Discount Rates, available at SSRN: http://ssrn.com/abstract=111332

[7] Mishan, E.J. and Quah, E. (2007) Cost Benefit Analysis, 5th Edition, Routledge, ISBN 0415349915