Social discount rate

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Social Discount Rate is a measure used to help guide choices about the value of diverting funds to social projects. For example, it may be used in estimating the value of creating a highway system, schools, or forcing environmental protection. Other uses of the funds are typically presumed to take place more immediately and in the private sector. A social Discount Rate is sometimes denoted as SDR.

The SDR is directly analagous to concepts found in Corporate Finance such as the hurdle rate or the project appropriate discount rate; so the mathematics are identical. A higher SDR makes it less likely a social project will be funded. A higher SDR implies greater risk that the benefits of the project will be reaped.

But there are a number of qualitative differences between social and corporate discount rate and evaluation of projects associated with them. Of course, the governance of social project funding is different, because estimating the benefits of social projects requires making ethically subtle choices about the benefits to others.

For example if we presume that a meteor will wipe all life in a few years the SDR is very high, or alternately if we presume that the population will have many new and wonderful choices capturing benefits (i.e. they will be more wealthy) in the future that too raises the SDR of creating any given benefit. For example choices about the SDR of environmental protection projects, such as funding the reduction of global warming, placing a valuation on future generations.