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<br />24166
<br />
<br />The projections presented here and
<br />'elaborated in a separate Council pUb-
<br />lication may also serve as a. convenient
<br />basis for preparing alternative proJec-
<br />tions for use in sensitivity analysis. .
<br />WWle a. relatively high rate of employ-
<br />ment has been assumed in national pro-
<br />Jections, it is recognized that chronic
<br />unemployment and underemployment
<br />are problems in many regions. The as-
<br />sumption of a Wgh rate of employment
<br />nationally does not preclude considera-
<br />tion of the occurrence of short-run or
<br />cycllcal fluCtuations in the national
<br />economy or special analyses of regions
<br />with relatively low econanUc activity and
<br />high rates of unemployment.
<br />Planning will alSo take account of na-
<br />tional and State environmental and so-
<br />cial 'standards such as water quality
<br />standards, eJ.r quaUty standards, or min-
<br />!mum health standards.
<br />The Water "Resources COWlcil will. as
<br />necessary. deSignate areas where special
<br />consideration should be given to these
<br />values.
<br />
<br />B. MEASUREMEN'l' OF BENEFICIAL AND
<br />ADVERSE EFFEC'l'S
<br />
<br />In planning water and related land"
<br />resow'ces. benefic1al and adverse etfect.s
<br />of a. proposed plan" should be measured
<br />by comparing the estimated conditions
<br />with the plan with the conditions ex-
<br />pected without the plan. Thus, in addi-
<br />tion to projecting the beneficial and
<br />adverse effecta expected with the plan in
<br />opemtlon, 1t is necessary to project the
<br />conditions likely to occur In the absence
<br />of the Plan. Since economIc, social, and
<br />environmental conditions are dynamic,
<br />changes will occur without the plan in
<br />a variety of factors. inclUding regional
<br />economic actIvity, rates of unemploy-.
<br />ment or underemployment, and envtron-
<br />mental conditions. Consequently, only
<br />new or additional beneficial and adverse
<br />etrects resulting from the proposed plan
<br />should be attributed to It,
<br />
<br />c. PRJCE RELATIONSHIPS
<br />The prices of goods and services used
<br />for evaluation should reflect the real ex-
<br />change values expected to prevail over
<br />the periOd of analysis. For th1s purpose,
<br />relative price relationships and the gen-
<br />eral level of prices for outputs and in-
<br />puta prevailing during - or lmmedJately
<br />precedlng the period of planning gener-
<br />ally will be used as.representJng the price
<br />relationships expected over the Ufe of
<br />the plan. Exceptions to the generaJ rule
<br />will occur when the output or input of
<br />the plan atrects prices, abnormal weather
<br />or other factors have temporarily affected
<br />prices, or governmental or other institu-
<br />tional arrangements. have temporarily
<br />affected prices.
<br />The Water ResoW"ces Council will pub-
<br />Ush periodJcaUy data on prices of agri-
<br />cultural and other gOOds lUld services
<br />that can be furnished eflicIently lor all
<br />planning activities. Included in these
<br />publications may be special a.naJyses of
<br />price problems and simulated prices tor
<br />recreation and other. project outputs or
<br />effects for which market prIces are not
<br />readIly available.
<br />
<br />NOTICES
<br />
<br />D. 'l'HE DISCOUNT RATE
<br />
<br />,The discount rate will be established
<br />in accordance with. the following
<br />concept:
<br />The opportunity cost 01 a.ll Federa.!
<br />investment activities, mc]ud1ng water re-
<br />source projects, Is recognized to be the
<br />real rate of return on non-Federal in-
<br />vestments. The best approximation to the
<br />conceptually correct rate is the aVerage
<br />ra.te at return on private investment in
<br />physicBl assets, including all specific
<br />taxes on capital or the ealnlngs'of capi-
<br />tal and exclUding the rate of general.
<br />inflation, weighted by the proportJon of
<br />private investment in each major sector.
<br />The difference between the interest
<br />rate paid on Federal borrowings and the
<br />opportunlt.y cost rate in the priva.te
<br />sector Is due in part to the fact that pri-
<br />vate rates of return must be sumc1ent to
<br />pay taxes on earnings of capital. When
<br />investments are made by the Federnl
<br />Government, these tax revenues are fore-
<br />gone. Use of the oPPortunity cost rate in
<br />evaluating Federal investments is neces-
<br />sary therefore to achieve equity from the
<br />standpoint of the Federal taxpayer who
<br />must finance Federal investments. .The
<br />Federal Government shOUld not displace
<br />funds 1n the prtva.te sector unless its re-
<br />turn on in vestment is equal to or la.rger
<br />than that in the private sector.
<br />1. The opportunity co.!t 01 oovern.ment
<br />investment. Abstracting from 1ncome
<br />distribution considerations, the totaJ.
<br />value or the Nation's resources is niaxi-
<br />mized by expanding or contracUng any
<br />specifiC activity to a. level such that the
<br />marglnal VDJue of resources in that activ...
<br />Ity ls equal to their 'marglnaJ vaJue In
<br />other feasible uses: Alternatively, the
<br />marginal value of resources in any activ-
<br />ity. is equated with the marginaJ. coot of
<br />that activity, where cost represents the
<br />highest value foregone use of th06e re-
<br />sources in alternative actiVities. Th1B gen-
<br />eral principle also applies to the Federal
<br />Govenunent. For given total Federal out-
<br />lays, the net benet1t generated boy the
<br />FederaJ. Government Is maxlm1zed by
<br />expanding or contracting IndlvlduaJ
<br />Federal activities to 8 level for which
<br />the marginal value of resources is equal
<br />to the marginal cost of .resources In all
<br />actlvltles, If aJI Federa.!' actlvltles in-
<br />volved only a single time period, the
<br />prices of resources purchased by the Fed-
<br />eral Government (including any specific
<br />excise taxes or subsidies to wh1ch other
<br />institutions are subject) , would be a suf-
<br />ficient bBBis for estimating the cost of
<br />Federal activities. For th06e Federal
<br />activities that involve a distrlbutlon of
<br />costs over time, however, some estimate
<br />of the marginal value or resources in
<br />present uses relative to their value in
<br />future uses Is necessary to estimate the
<br />cost of government activities, and this
<br />value is reflected by the selection or an
<br />appropriate interest rate for evaluating
<br />Federal investDJ.ent actiVities. For any
<br />given Federa.! budget, the net ben6l1t gen-
<br />erated by the Govenunent ls ma.x1m.lzed
<br />only If tbe marg!naI rate 01 retwn em a.ll
<br />Federal activities is equal. However, Ule
<br />net benefit. generated by Government Is
<br />
<br />maximized only when the marginal rate
<br />of return on FederaJ investmenl.'l Is equal
<br />to the m.at"ginal rate ot return. on invest-
<br />ments by other lnatituUons In th1s
<br />Nation. Only this second condition as..
<br />SUres a ma.ximlzatlon of the net beneflts
<br />of the Nation's investment actll'1tie.s and
<br />the appropriate division ot investment
<br />activities between the Federal Govern..
<br />ment and other institutions.
<br />The establishment of an interest rate
<br />for evaluation of Government invest..
<br />ments is derived from this second condi..
<br />.tlon. Once this rate is deterntined, indi..
<br />vidual Government investment a.ctivities
<br />should be expanded or contracted to 8
<br />level such that the marginal rate of re-
<br />turn equals this rate,' The conceptuaJl,
<br />correct rate for FederaJ Investment&. BB"
<br />suming that the non-Federal seemr will
<br />allocate additional investment funds
<br />among alternative uses in roughly the
<br />same manner as the present d1stribu..
<br />tIon, is the average or the marginal real
<br />rates of return in each part of the non..
<br />Federal sector, weighted by the propar..
<br />tion of present investment in each part.
<br />2. Estimatino the discount rate for
<br />Government investment.!. Estimating the
<br />appropriate real interest rate for FederaJ
<br />investments involves several problems:
<br />First, the criticaJ a.ssumptton must be
<br />made that the dJfferent observed mtes of
<br />retum within the non-Federal sector
<br />represent equillbrium diiIerences (re..
<br />fleeting different risks, taxes. and. sub-
<br />sidies) or that the Federal Government
<br />doeS not systematically channel re-
<br />sources .into a specific part of the non-
<br />Federal sector in its Investment activities.
<br />II the Federa.! Government oouId e1fec-
<br />tively chamiel resources into those parts
<br />of the non-Federal seem with. the
<br />highest rates 01 return, the opportunity
<br />cost of Federal investments would be
<br />hIgher than the avel'a€e ot the marginal
<br />returns. Second, there are conceptual
<br />d1llicrultles In estimating the marglnaJ
<br />rate of return on Investments in State
<br />and local governments, and no compre..
<br />hensive ast:ImB.te of th!s mte has been
<br />made. Third, the available data provide
<br />a bBBIs for estimating onlY the average
<br />rate of return in the private sector. It' the
<br />average rate of return is constant (BB a
<br />tWlction of the level ot investment), thiB
<br />is not a problem as the average and
<br />marginal rates are equal and, in the
<br />long run. this appears to be a good. ap-
<br />prqx1mation. In the short run, the rate ol
<br />retum on priva.te investment displaced
<br />by additional government Investment is
<br />probably hIgher than the average rate.
<br />The best approxImation to Ule concep-
<br />tually correct rate that can be made .Is
<br />the average of the average rates of re..
<br />turn on private investment, weighted. by
<br />the proportion of investment in dJfferent
<br />parts of the private sector. ThIs rate has
<br />been calculated In J, A. Stock1lsch,
<br />"Me..,urlng the Opportunity Coot 01 Gov-
<br />ernment Investment, H Institute for De-
<br />fense AnaJyses, P--490. March 1969,
<br />Stockllsch lIrst estimates the average rate
<br />of .return on physical assets (exclusive of
<br />cash holdings). Including the spec!fic
<br />(corporate and property) taxes on capi-
<br />tal, far the period front the Korean war
<br />
<br />, '
<br />I
<br />I
<br />
<br />FEDERAL REGISTER, VOL. 36; NO. 24S-TUESDAY, DECEMBER 21. 1971
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