Social Discount Rates and Welfare Weights for Public Investment Decisions under Budgetary Restrictions: The Case of Cyprus

Abstract

This paper focuses on the estimation of key welfare parameters for incorporation into social cost-benefit analysis (CBA) with special reference to Cyprus and its unique regional problems. In particular, the theory and application of social discount rates and regional welfare weights are considered from the perspective of the European Commission as both supranational planner and provider of major funding for investment in the EU-12 area. The aim is to provide answers to three main questions. First, should different discount rates be applied in the appraisal of projects impacting on the Turkish and Greek regions of the island? Second, if different discount rates apply, then what approach should be taken in the discounting of costs and benefits for projects impacting on the entire island? Finally, what is the best method to estimate regional welfare weights for Cyprus and how should these weights be applied in social CBA in order to take proper account of the considerably lower average standard of living in North Cyprus? This particular case study serves to highlight a practical procedure, with suitable theoretical underpinnings, for the calculation and incorporation of regional welfare weights in social CBA more generally and especially with regard to Europe. © 2011 The Authors Fiscal Studies, © 2011 Institute for Fiscal Studies. © 2011 Elsevier B.V., All rights reserved.