122 MULTIPLE PURPOSE RIVER DEVELOPMENT 



monetary authorities and the circumstances at the time, the rate 

 might be somewhat higher or lower; but the difference in cost 

 under the two types of policies is moderate. The extent to which 

 the resources will be drawn out of investment rather than con- 

 sumption will differ more broadly, however. 



AN alternative: separating risk-bearing 



FROM PURE INTEREST 



So far, we have treated risk as a source of market imperfection, 

 and have considered differences in interest rates caused by varying 

 risk premiums to lead to a misallocation of resources. In the model 

 we employ, a correct allocation of resources would require that the 

 rate of return on marginal investments of all kinds be the same. If 

 it were not, the total return could be increased by switching invest- 

 ments from fields with low marginal returns to fields with higher 

 returns. In the real world, where there are differences in risk, a 

 higher return is expected to prevail on the riskier investments, with 

 part of this higher return a risk premium. This is a reward for 

 taking risks, and may be needed to attract capital into risky uses. 

 Yet our model would consider such differences inefficient; we 

 assume that the riskiness of the returns on an investment do not 

 detract from their contribution to real national income. That is, 

 the satisfaction derived from the national output is independent 

 of the total amount of risk taken on the nation's investments. 



In the context of public investments, there is considerable justifi- 

 cation for this assumption. From the point of view of the economy 

 as a whole, the risks on investment are far smaller than the sum of 

 risks of individual investments. Where one undertaking in one 

 locality may fall far short of its expected outcome, other under- 

 takings will succeed beyond expectations, and to some extent the 

 failure of some assures the success of others. There is much can- 

 cellation of risks since the insurance principle of pooling reduces 

 greatly the relative dispersion of outcomes for the nation's invest- 

 ment program as a whole. And, from the point of view of the 

 long-run growth of the country, the increase of national income 

 produced by risky investments on which a high return is to be 

 earned, whatever the reason, will be greater than the increase of 

 income to be expected from low-risk, low-return investments. 



