ABSTRACT
In his well-know n paper on the choice of discount rate for public in vestm en t de cisions, W illiam B aum ol noted the appar ent im possibility of reconciling the argu m ents in favor of using a pure tim e pref erence rate w ith those in favor of using the marginal rate of return to p rivate in vest m ent, the “ opportunity co st” of funds. On the one hand it w ould seem there is a clear opportunity for welfare gain in under taking an in vestm en t w ith rate of return in excess of a social tim e preference rate, however determ ined. On the other hand, it would clearly be possib le to do even better by leaving the resources in the private sector if the rate of return on private investm ent exceeded the return on the governm ent project.
