Choosing the Social Discount Rate for Australia

16 Pages Posted: 2 Mar 2018

See all articles by Peter Abelson

Peter Abelson

Macquarie University

Tim Dalton

Applied Economics Ltd.

Date Written: March 2018

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

Abelson, Peter and Dalton, Tim, Choosing the Social Discount Rate for Australia (March 2018). Australian Economic Review, Vol. 51, Issue 1, pp. 52-67, 2018, Available at SSRN: https://ssrn.com/abstract=3132791 or http://dx.doi.org/10.1111/1467-8462.12254

Peter Abelson (Contact Author)

Macquarie University ( email )

North Ryde
Sydney, New South Wales 2109
Australia

Tim Dalton

Applied Economics Ltd.

no address available
United Kingdom

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