The Hells Canyon Case 147 



incremental costs is about 1.9:1. In short, provided that an interest 

 rate of 2.5 per cent would be acceptable (subject to all of the quali- 

 fications implicit in our treatment of the problem in Chapter IV), 

 the High Dam appears more efficient. 



In Chapter IV, however, some questions were raised regarding 

 the relevance of the conventional rate used to evaluate projects. 

 Given the preferences of individuals presently making up our 

 society, the structure of taxes relevant to the case, and the prob- 

 able incidence of the increased income (or of decreased income) 

 of private individuals and enterprises contingent on a tax reduc- 

 tion (or an increase in taxes), an opportunity cost equivalent to 

 5 or 6 per cent seems appropriate for the funds raised by federal 

 taxation — or the funds which are prevented from being distributed 

 to private parties through a reduction in federal taxes. This 

 implies that a rate of return of t as level should be earned at the 

 margin if water resource development projects are to be econom- 

 ically efficient. If the conventional rate of 2.5 per cent is imputed 

 for purposes of project evaluation, accordingly, an incremental 

 benefit-to-cost ratio in excess of 1.9:1, rather than simply in excess 

 of 1:1, would be required to ensure a rate of return to capital that 

 would be equivalent to the opportunity cost of the tax-raised 

 funds. There are certain advantages in using the lower rate as 

 an imputed interest charge coupled with a higher benefit-cost 

 ratio.^^ However, when projects of similar capital intensities are 

 being compared, equivalent results can be approximated in a more 

 straightforward manner by simply imputing an interest rate 

 equivalent to our opportunity cost. 



Accordingly, if, for purposes of evaluating the alternative plans 

 of development, we impute an interest rate of 5.5 per cent, the cost 

 data of our previous comparisons will be altered substantially. 

 The results, which appear in Table 22, show an added cost of 

 around $13 million for the High Dam. The added benefit of $12 

 million no longer justifies on efficiency grounds the added cost; 

 the added benefit-to-cost ratio is only 0.9:1.^^ It is conceivable that 



'* Otto Eckstein, Water Resources Development: The Economics of Project 

 Evaluation (Cambridge: Harvard University Press, 1958), Chapter iv. 



"It must be acknowledged that this conclusion is particularly affected by the 

 set of data which is employed. We have used Witness Cotton's estimate of 

 prime power output, equivalent to 961,000 and 702,000 kilowatts, respectively, 

 for the High and three low dams. This is consistent with an average depletion 



