The Implications of the Shadow Price of Capital in Cost-Benefit Analysis

Abstract

This paper explores the relevance of Bastiat’s famous distinction between the seen and the unseen consequences of actions to modern debates about cost-benefit analysis. In cost-benefit analysis, the opportunity cost of capital describes the unseen future returns a capital asset generates. However, there is no consensus among economists as to how to account for these returns, as disagreements are wrapped up in a broader controversy surrounding the correct social discount rate. The paper provides background on these debates and explains how adherents of the two mainstream discounting approaches both fail to live up to Bastiat’s standard of a “good economist.”