The Social Discount Rate: A Primer for Policymakers

8 Pages Posted: 2 Jul 2020

See all articles by James Broughel

James Broughel

Competitive Enterprise Institute (CEI)

Date Written: June 30, 2020

Abstract

The social discount rate used in cost-benefit analysis (CBA) is an interest rate applied to benefits and costs that are expected to occur in the future in order to convert them into a present value. This conversion is done to ascertain what those benefits and costs are worth today. The social discount rate is widely considered to be one of the most important inputs in CBA in that small changes in this rate can result in large swings in present-value calculations, thereby having a major influence on whether a project passes or fails a cost-benefit test. However, the social discount rate is widely misunderstood for a variety of reasons. This primer explains the basic conceptual issues involved with the social discount rate and tries to clear up some common misunderstandings.

Keywords: social discount rate, opportunity cost of capital, social planner, declining discount rates

JEL Classification: H43, D61, K23

Suggested Citation

Broughel, James, The Social Discount Rate: A Primer for Policymakers (June 30, 2020). Mercatus Research Paper, Available at SSRN: https://ssrn.com/abstract=3639628

James Broughel (Contact Author)

Competitive Enterprise Institute (CEI) ( email )

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