Choosing the Social Discount Rate for Australia

This article argues that in cost-benefit analysis government should adopt the opportunity cost of capital as represented by the alternative project rate of return as the social discount rate rather than the private or social time discount rate or a weighted cost of funds rate that reflects estimated proportions of investment and consumption foregone. The appropriate metric for the alternative project rate of return is average market return allowing for non-diversifiable risk but not for diversifiable project risk. The article concludes that the appropriate social discount rate for Australia, for all sectors and states and territories, is approximately 6.5 per cent.