by Richard O. Zerbe Jr.
January 09, 2014
Public sector investments should occur if and only if their return exceeds the opportunity cost of available projects. This cost consists of reduced consumption and displaced private capital. Other suggested rates are confusing because they incorporate extraneous values as part of the rate, including special values for goods such as health or life, or rates derived from polls of economists. Rates of individual time preferences from survey data are too varied and uncertain to use alone. More fundamentally, they fail to correctly treat the capital penalty of government investment. Ethical and moral considerations are best treated as values attached to the value of goods to be counted in the present. These extraneous factors can be, and should be, counted separately and not as part of the interest rate.