The Alabama-Coosa River Systern 189 



enterprise, funds available from venture sources will require a 

 higher rate of return than the preferred stock or bonds. It then is 

 reasonable to assume a higher effective rate as the cost of invest- 

 ment funds for a private firm than was employed in the example 

 above. Moreover, a private firm will face other elements of cost — 

 not faced by a public undertaking — which have implications for 

 the effective cost of capital, and the resulting benefit-to-cost ratio 

 of the incremental capacity. If we assume, as in Table 33, that an 

 effective rate of 5.5 per cent represents the cost of investment funds 

 for a private utility,^*^ and that structures will be identical with 

 those envisaged under Plans I and II of Table 32, we obtain a sub- 

 stantially different impression of the relative economy of the incre- 

 mental development. The development of the Howell Mill Shoals 

 site by a private enterprise unit would result in a larger increment 

 in annual costs than in public benefits. Under the relevant condi- 

 tions governing private investment decisions, therefore, the added 

 costs of $3.5 million attending Plan II exceed the added benefits 

 of $2.1 million. The ratio of the annual added benefits to costs 

 (private) is only 0.59:1." 



What is the meaning of this seeming paradox — that under public 

 development one alternative appears to be the more efficient, 

 whereas under private development the other seems to be so? 



In a market economy under perfect competition such a paradox 

 could not arise. The value of every factor would have to be the 

 same at the margin in every application for efficiency conditions to 

 be met. It follows, therefore, that the cost of the services of capital 

 in a competitive economy would be the same at the margin, not 

 only as among uses but also as among users. In the workaday 

 economy, however, the model's conditions assumed in specifying 

 efficiency conditions are not realized. Of particular significance in 

 the actual case is the fact that federal taxation in lieu of competi- 

 tive bidding in the capital market is the more likely alternative in 

 financing federal water resoince projects. One approach to resolv- 



^A rate of 5.5 per cent is suggested by the FPC's staff for evaluating power 

 costs. Sec Fedcial Power Commission, Riireaii of Tower, Injoriualion for StafJ 

 Use in Esliinnting Electric Pmrrr Costs arjd Values, Jcclinical Memorandum 

 No. 1, November 1955, p. 31. 



^' No particular significance attaches to the coincidentally identical ratio in 

 ihe example above with the ratio (0.59:1) referred to in Itschner's letter, op. cit. 



