The Theory of Optimal Social Discount Rate

Abstract

In chapter 3 and 4 in companion Volume devoted to identification and measurement theory [931b] we presented theoretical structures of cost and benefit accounting in benefit-cost analysis. The two chapters were preceded by Chapter 2 of the theory of computable cost-benefit identification matrices. Computations of static and flows of benefits and costs of a project or a decision that alters the social welfare state of an economy at the reference pint of decision were presented. Discussions were advanced to show how to extend the theory of computable cost and benefit matrices to decisions of engineering and mechanical systems. To make cross-sectional aggregation of heterogeneous real cost and benefit characteristics possible the theory of optimal prices was presented in Chapter I of this Volume. Given the time dimension of the flows of costs and benefits in the lifetime of social decisions and projects, there arises an important need to connect the future values to the present values if these values are differentially preferred by individual members as well as the community as we travel through time. Connecting the future values to those of the present is the discounting process that is done through logical assignments of converting weights at each point of time. Such a weighting process allows us to develop present-value equivalences of future values leading to weighted aggregates of costs and benefits or net cost-benefit for decision making in the present context.