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00:1333 23 Dr. J. A. Stockfisch, Economist, The Rand Corporation "The major reason for use of the private opportunity rate of return, as I see it, rests on the interrelated ideas that cost- benefit analysis requires that a 'sharp conceptual distinction be adhered to with regard to costs and benefits, and that the govern- ment employ the same 'counters' as does its subjects in reckon- ing the value of resource inputs that are acquired to conduct government activities. The first idea, that cost and benefits .(or utility) be kept conceptually distinct, accepts the notion that decisionmaking affecting the allocation of scarce resources requires some coherent way of ranking alternative uses to which resources may be put. Cost, in this sense, then comes down to providing a measure of alternative uses that are given up as a result of a particular course of action. "The second idea, that the government employ the same 'counters' as does its citizens, rests on the belief that the cost of government resource using activity should be revealed (or exposed?) in terms of things the citizens are called upon to give up, through the workings of the government's use of coercive financial devices like taxation and money creation. Generally, with the important exception of procurement of military manpower by means of conscription, this principle is adhered to when the government hires labor in the market. I contend that the cost of capital inputs should be placed on 'all fours' with labor inputs. To use a rate of discount that departs from the private opportunity return, which the government can easily do because it is not obliged, for example, to lease or hire its capital goods (as it hires labor), simply renders ambiguous the cost calculations of its resource-using activities. "This general line of reasoning, incidentally, is neutral on the matter of whether the government sector should be large, or small; or whether there should be more or fewer water projects, or more or less defense spending and so on. It does not depend upon any assumption that the existing allocation of resources which can affect the relative cost (or prices) of different inputs is 'optimal', by any of a possibly large number of criteria that might describe optimality. Nor does it rest upon the idea that cost is, in fact, independent of demand or the valuation of outputs, or utility or benefits (although the argument that cost and benefit be kept conceptually distinct could be so construed); indeed, cost and demand (or valuation) are mutually interdependent, as a clear understanding of the opportunity cost doctrine within the context of a social economy makes evident.