72 MULTIPLE PURPOSE RIVER DEVELOPMENT 



recent years to specifying the needed criteria. ^^ Such criteria nor- 

 mally require equating the value of the social marginal product 

 of a factor to its social cost, in contrast to balancing private costs 

 and gains at the margin, as in a purely market economy. The 

 valuation of the social product, or benefits, takes account of the 

 divergences between the private and social product which arise 

 when conditions in the actual economy depart from those of the 

 competitive model. On the cost side, the principal problem is that 

 of estimating the social cost of public funds, except under circum- 

 stances of unemployment. ^° 



The rationale underlying the evaluation of benefits and costs 

 for purposes of this study is as follows: Since we are concerned 

 only with multiple purpose projects of considerable size, we recog- 

 nize that the collective action which is relevant, and hence the 

 public funds which are primarily at issue, are federal. If federal 

 resources are involved, we assume the objective of their use is to 

 improve national economic efficiency. ^^ Moreover, we restrict our 

 attention to improvements in national economic efficiency that can 

 be secured through use of federal funds for influencing factor 



^* A pioneering attempt is the 1950 report to the Federal Interagency River 

 Basin Committee, Proposed Practices for Economic Analysis of River Basin 

 Projects, prepared by the Subcommittee on Benefits and Costs. More recent 

 contributions in this area have been made by Roland McKean, Cost Benefit 

 Analysis and Efficiency in Government (Santa Monica: Rand Corporation 

 Research Memorandum, 1955), and by Otto Eckstein, Water Resources Develop- 

 ment: The Economics of Project Evaluation (Cambridge: Harvard University 

 Press, 1958). For application to underdeveloped areas, where problems of the 

 nature discussed above appear in intensified form, see Hollis B. Chenery, "The 

 Application of Investment Criteria," Quarterly Journal of Economics, February 

 1953; and Otto Eckstein. "Investment Criteria for Economic Development and 

 the Theory of Intertemporal Welfare Economics," Quarterly Journal of Eco- 

 nomics, February 1957. 



'"In this study, since we assume pursuit of an effective economic stabilization 

 policy, consistent with the intent of the Full Employment Act of 1946, we need 

 not concern ourselves specifically with this prol^lcm. It is true, however, that 

 even under conditions of relatively full employment throughout the economy, 

 pockets of underemployment in some areas or regions may occur. In this case, 

 the market rates of hire for construction labor may not accurately reflect the 

 opportunity cost of labor, and an appropriately downward adjustment for this 

 component of construction cost would be required to reflect accurately social 

 cost. 



"This is not to deny that there can be other objectives — social, strategic, etc. 

 — for which federal funds may be employed in the water resources field. It 



