The derivation of discount rates with an augmented measure of income

Abstract

Most developed economies invest in public goods such as national defense, education, infrastructure, and the environment. Discount rates used to evaluate such projects should reflect the rate of return on the current mix of investment opportunities. Rates derived from the productivity of private capital neglect returns beyond the market boundary. The present paper derives discount rates using an augmented measure of national income inclusive of non-market goods. In an empirical application focusing on air pollution and climate damages in the United States economy, the paper reports that the difference between augmented and market discount rates averages 0.3 percentage points from 1999 to 2014.