Intertemporal Income Distribution Aspects

Abstract

Under conditions of perfect competition, the market interest rate equates individuals’ marginal time preferences with the marginal rate of return on investment. But, in the real world capital markets have many `imperfections’. Corporate and personal income taxes, risk elements, government interventions, limited access to capital markets and monopoly elements are just a few of the many factors that drive a wedge between the time productivity of capital (the rates of return) and lenders’ time preference rates. In Chapter 3 we argued that when investments are optimal for the country as a whole, the opportunity cost of capital to the Government should be measured by the rates of return foregone in the private sector. This argumentation is valid under the stipulated condition. However, it may be possible that the investments of the country as a whole are considered suboptimal, and several writers have argued that in such a case public sector investment decisions should not be based on rates of return foregone in the private sector, but on a discount rate — which we shall call the social discount rate — that takes into account that investments should be promoted.