142 MULTIPLE PURPOSE RIVER DEVELOPMENT 



alternative plans into their economic counterparts, we employ 

 benefit-cost comparisons.^ 



Costs and Benefits of Federal Development of 

 a High Dam and Three Low Dams 



Consider first the costs under federal development. Because of 

 the great capital intensity of multiple purpose river structures, the 

 most significant element of cost is represented by imputed capital 

 charges. In Chapter IV, two views with respect to capital costs were 

 considered: (1) the opportunity cost of funds obtained by means 

 of federal taxation, derived by reference to individual preferences 

 of members making up the present generation of society; (2) the 

 typical conservation viewpoint which implicity attempts to take 

 into account the preferences of individuals comprising future gen- 

 erations of society, and thus seeks a redistribution of income toward 

 the future. Since the lower interest rate associated with the second 

 approach is consistent with the traditional practices in evaluating 



* Benefit-cost analysis is useful in providing the correct investment criterion 

 for evaluating projects, but the criterion may differ depending on the nature 

 of the specific problem assumed. On the one hand, a correct investment criterion 

 will assure that the best use is made of federal funds and that no funds are 

 used in the government sector which would have yielded greater benefits in the 

 private sector in the applications from which they would be withdrawn. 

 Several criteria may then be appropriate, depending on the problem at hand. 

 If it is assumed that the federal budget is limited, a rational allocation of fed- 

 eral funds would require undertaking those projects which have the highest 

 benefit-cost ratios in descending order until the limited funds were exhausted. 

 This would involve passing up projects for which estimated benefits exceeded 

 costs — costs in the sense of alternatives foregone in the private sector, but not 

 the opportunity costs represented by the better projects in the public sector. 

 On the other hand, if no budget restraint is imposed, it is assumed that invest- 

 ment is undertaken in the public sector in an amount sufficient to equalize the 

 social product at the margin in the private and public sectors. In such cases, 

 all investment opportunities in the public sector which promise benefits suffi- 

 cient to compensate for alternatives foregone in the private sector are assumed 

 to be undertaken. If an interest rate equivalent to the opportunity cost of 

 federal funds is imputed, therefore, all projects (or, more properly, project 

 increments) with benefit-cost ratios in excess of unity would qualify. The latter 

 approach underlies the analyses which follow. 



