ABSTRACT
In the spirit of Arrow and Lind’s analysis, we have reexamined the private and social costs of bearing the risks associated with public expenditure on projects of uncertain value. Beginning with the observation that the Arrow-Lind Theorem applies to projects whose benefits are provided by services that are wholly rival in consumption, we analyze the cost of risk for projects that provide a mix of rival and non-rival consumption benefits. Intuition suggests that both private and social costs of risk bearing decline as the degree of rivalry increases and as the size of the population increases, since these costs both vanish in the limit case with perfect rivalry and an infinite population. We confirm these intuitive predictions for selected economic environments, but show that if DARA is sufficiently strong these predictions fail to hold.
