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PONTIFICIAE ACADEMIAE SCIENTIARVM SCRIPTA VARIA - 28
possibilities and might appropriate the funds for ‘the requisite
investments. Beginning in the 1930’s in my country, and at
other dates elsewhere this process has become increasingly
formalized and bureaucratized. Now a project proposal must
be accompanied by an elaborate dossier setting forth estimates
of its various economic and non-economic consequences and
purporting to justify it by appeal to objective criteria. If the
American Congress or other local legislature doesn’t insist on
such a formal justification the World Bank will. We have even
extended the range of activities counted as government invest-
ments. Expenditures on education, for example, are now fre-
quently considered under that heading.
It is therefore appropriate for us to consider the application
of quantitative methods of economic analysis to the appraisal
of proposed public investments. We shall assume throughout,
as a background, a mixed economy, one in which the public
and private sectors are both significant. The issue of public
investment cannot arise, by definition, in a pure private eco-
nomy, if theré is one anywhere in the world. It takes an ‘enti-
rely different form and meaning in a pure public economy.
Thus we shall assume a mixed economy, and though we shall
concentrate on the public sector the private sector will always
be visible in the background.
The broad subject of government investment has already
accumulated an imposing literature, which I shall not survey.
Rather I shall advance a proposal concerning one central issue
that the literature, as I know it, treats unduly lightly.
The analysis of public investments is strongly analogous
to the problem of capital budgeting in the context of a private
firm. Both are motivated by the need for wise allocation of
scarce resources, and similar conceptual issues arise in the two
cases. In both cases the benefits promised by the project must
be weighed against the costs it entails and competing projects
laying claim to the same resources must be compared. But in
the case of government undertakings both the benefits and the
3] Dorfman - pag.
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