The Social Cost of Public Finance

Abstract

This paper examines the implications for fiscal policy of systematic differences between (social) rates of return on private investment and savings. We show that the social discount rate lies between these divergent rates of return, that the controversy between this result and Marglin's stems entirely from different treatments of depreciation, and that reinvestment of net project output has negligible quantitative effects on the social discount rate. Then, within a macroeconomic framework, we derive the stringent conditions for a unique discount rate and demonstrate that, as public-sector consumption must also be charged a shadow price, the social value of a global change in output induced by countercyclical fiscal policy must exceed its (nonzero) social cost. Finally, we examine the Little-Mirrlees concept of the social cost of labor and find it unacceptable.