Social Discount Rate

The discount rate adjusts future benefits and future opportunity costs for accurate comparison with present values. (Other entries, “Discounting the Future” and “Net Present Value,” explain the mathematics of discounting to net present value.) The social discount rate is the discount rate that should be applied to cost-benefit analysis of government investment projects generating benefits and costs over time. In economic theory, such government projects should provide public goods demanded by consumers who will not voluntarily reveal their true preferences in terms of paying for those goods. A prominent example is water resource projects for irrigation and electricity.

A simple illustration demonstrates the role and importance of the social discount rate. Suppose that a specific flood control project yields annually a 5% net benefit above opportunity ...