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Choosing the Social Discount Rate for Australia

Author

Listed:
  • Peter Abelson
  • Tim Dalton
Abstract
This article argues that in cost–benefit analysis government should adopt the opportunity cost of capital as represented by the alternative project rate of return as the social discount rate rather than the private or social time discount rate or a weighted cost of funds rate that reflects estimated proportions of investment and consumption foregone. The appropriate metric for the alternative project rate of return is average market return allowing for non†diversifiable risk but not for diversifiable project risk. The article concludes that the appropriate social discount rate for Australia, for all sectors and states and territories, is approximately 6.5 per cent.

Suggested Citation

  • Peter Abelson & Tim Dalton, 2018. "Choosing the Social Discount Rate for Australia," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 51(1), pages 52-67, March.
    • Handle: RePEc:bla:ausecr:v:51:y:2018:i:1:p:52-67
    DOI: 10.1111/1467-8462.12254
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    References listed on IDEAS

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    1. Harberger, Arnold C. & Jenkins, Glenn P., 2015. "Musings on the Social Discount Rate 1," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 6(1), pages 6-32, April.
    2. Burgess, David F. & Zerbe, Richard O., 2013. "The most appropriate discount rate," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 4(3), pages 391-400, December.
    3. Martin L. Weitzman, 2001. "Gamma Discounting," American Economic Review, American Economic Association, vol. 91(1), pages 260-271, March.
    4. Bradford, David F, 1975. "Constraints on Government Investment Opportunities and the Choice of Discount Rate," American Economic Review, American Economic Association, vol. 65(5), pages 887-899, December.
    5. David F. Burgess & Richard O. Zerbe, 2013. "Appropriate discounting for benefit–cost analysis," Chapters, in: Scott O. Farrow & Richard Zerbe, Jr. (ed.), Principles and Standards for Benefit–Cost Analysis, chapter 7, pages 247-263, Edward Elgar Publishing.
    6. Kenneth J. Arrow & Robert C. Lind, 1974. "Uncertainty and the Evaluation of Public Investment Decisions," Palgrave Macmillan Books, in: Chennat Gopalakrishnan (ed.), Classic Papers in Natural Resource Economics, chapter 3, pages 54-75, Palgrave Macmillan.
    7. Kenneth J. Arrow & Maureen L. Cropper & Christian Gollier & Ben Groom & Geoffrey M. Heal & Richard G. Newell & William D. Nordhaus & Robert S. Pindyck & William A. Pizer & Paul R. Portney & Thomas Ste, 2014. "Editor's Choice Should Governments Use a Declining Discount Rate in Project Analysis?," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 8(2), pages 145-163.
    8. Michael Spackman, 2013. "Government Time Discounting and Required Rates of Return: UK History and Current Issues," Economic Affairs, Wiley Blackwell, vol. 33(2), pages 190-206, June.
    9. Burgess David F. & Zerbe Richard O., 2013. "The most appropriate discount rate," Journal of Benefit-Cost Analysis, De Gruyter, vol. 4(3), pages 391-400, December.
    10. Burgess, David F. & Zerbe, Richard O., 2011. "Appropriate Discounting for Benefit-Cost Analysis," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 2(2), pages 1-20, April.
    11. Sterner, Thomas & Tol, Richard S. J. & Weitzman, Martin L. & Pizer, William A. & Portney, Paul R. & Arrow, Kenneth J. & Cropper, Maureen L. & Gollier, Christian & Groom, Ben & Heal, Geoffrey M. & Newe, 2014. "Should Governments Use a Declining Discount Rate in Project Analysis?," Scholarly Articles 33373349, Harvard University Department of Economics.
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    Cited by:

    1. Nick Parr & Ross Guest, 2020. "Migrant Age Profiles and Long‐Run Living Standards in Australia," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 53(2), pages 183-197, June.
    2. Monjardino, Marta & Harrison, Matthew T. & DeVoil, Peter & Rodriguez, Daniel & Sadras, Victor O., 2022. "Agronomic and on-farm infrastructure adaptations to manage economic risk in Australian irrigated broadacre systems: A case study," Agricultural Water Management, Elsevier, vol. 269(C).
    3. Jarisch, Isabelle & Bödeker, Kai & Bingham, Logan Robert & Friedrich, Stefan & Kindu, Mengistie & Knoke, Thomas, 2022. "The influence of discounting ecosystem services in robust multi-objective optimization – An application to a forestry-avocado land-use portfolio," Forest Policy and Economics, Elsevier, vol. 141(C).

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