Production also affects the consumer. Here too, the effect may be positive or negative.
If the effect is positive, the consumer must pay for it. If it is negative, the consumer has
to be compensated.
External effects are often attributed to technological advances. In addition, government
assistance, including subsidies also have an external impact.
- Social Rate of Discount
3.1 Social time preference is based upon the assumption that (i) society
always prefers the present to the future, and (ii) the next generation will
have higher consumption levels It is not possible to estimate the
preferences of the generation. However, the benefits to be derived by
future generations must be greater than the cost of sacrifice of the present
generation. The time gap between these is taken as base for discounting
procedure.3.2 The unsubsidized interest rate as the cost of sacrifice by the present
generation may be taken as discount factor to calculate the present value
of the estimated returns to be received by the present generation and as
well as by future generation. Such discount factor will be the social rate
of discount.3.3 To make a choice between alternate projects the necessary condition is
that discounted benefits should exceed discounted costs. In other words
NPV >O.3.4 The Social Rate of Discount is taken as base to calculate the present value
of benefits and costs. While selecting a project on the basis of NPV
indicator, risk and uncertainty analysis must be undertaken. The major
problem is non-availability of exact/reliable data. The expected utilities
and the probabilities are the major factors of uncertainty. The driving
forces, sustaining forces, restricting forces shall be measured especially
under the key indicators. Too much of pessimistic or too much optimistic
estimations not to be considered. The calculations based on weighted
average or standard deviations may be more appropriate. In reality, it is
always safer to prepare for the marginal variations i.e., regarding the
difference between the actuals and estimations.