84 MULTIPLE PURPOSE RIVER DEVELOPMENT 



proportion of savers, who receive an income yield of only 4 per 

 cent, but who have been receiving large capital gains. 



Measuring the Social Cost of Public Capital: 

 The Method of this Study 



The task of discovering the true social cost of the capital devoted 

 to water resource development under actual conditions is much 

 more difficult than if our theoretical model applied in a straight- 

 forward way. The model determines one interest rate for each 

 period, a rate which indicates both the opportunity cost of capital 

 in other fields and the rate at which consumers are willing to give 

 up present income for a future income stream. In reality, there are 

 many interest rates for both borrowers and lenders, and we are not 

 free to fasten upon any one of them for our purpose. Yet the 

 sound formulation of public policy requires some clear idea about 

 this social cost. Use of a rate which is much too low may result in 

 the waste of the nation's capital in a project yielding less satisfac- 

 tion to consumers than if left in its alternative use. Use of an 

 excessively high rate will leave water resources underdeveloped as 

 compared to other resources in the nation's economy. For the 

 typical problem of financing public investment by taxation, we, 

 therefore, need to derive an appropriate estimate for the social 

 cost of capital. 



Our method will take account of the actual structure of capital 

 flows in the United States. First, we shall try to determine where 

 the tax money that provides the capital used for federal resource 

 development actually comes from — that is, the incidence of the 

 marginal tax dollars. This requires quantitative study of the 

 revenues produced by different taxes, the persons and organizations 

 who pay these taxes, and the extent to which taxpayers are able to 

 shift their tax liabilities to others. It also requires that we assume 

 in what proportion the various taxes would be increased were the 

 program to be expanded, or which ones would be cut in the 

 event of contraction. Once we know the sources of the money, 

 we can proceed to the second stage and estimate what value attaches 

 to these funds in their alternative uses. 



When government imposes taxes in order to finance public 

 investments, it levies a compulsory loan or forced saving on the 



