IV The Social Cost 



of Federal Financing 



We have seen how the interest rate in the competitive model serves 

 as a price in the capital market, bringing the savings preferences 

 of consumers into consistency with the investment plans of business 

 enterprises- Let us now extend the examination to investment 

 undertaken by government. 



Most of the activities of government are devoted to satisfying 

 collective wants, wants which cannot be met through goods and 

 services sold in the market place. Whenever the ballot box and 

 the political process replace market choice, investment decisions 

 will not be made by comparing the rate of return of investments 

 with the market rate of interest.^ Many of the collective goods 

 produced by public investments are valued qualitatively, preclud- 

 ing computations of the rates of return which underlie private 

 investment decisions. The costs are more specific, however; 

 resources employed in a public undertaking have alternative uses 

 in the production of marketable commodities and will, therefore, 

 have a price which measures their opportunity cost. 



This cost cannot be measured directly from the borrowing cost, 

 since the funds are raised by taxation, but within the competitive 



' Some goods, such as electric power, supplied by government are marketable; 

 others, such as flood control, though nonmarketable, can be valued at prices 

 established in related markets. Yet the fact that the investment decision is made 

 in a political context results in the introduction of other considerations and 

 makes it unlikely that the decision will be made in accordance with the eco- 

 nomic principle alone. 



78 



