Economic Pricing of Factors of Production

In the present chapter we examine the economic pricing of factors of production: labour, land and capital. Here the discussion centres initially on the concept of foregone output, the treatment of labour requiring a brief excursion into aspects of labour market theory. The problem of valuing land (including both renewable and non-renewable resources) is examined briefly in the context of the ‘with/without project’ situation. In looking at capital, attention is first drawn to definitional problems, and some simple theory is introduced to relate notions of time preference, marginal productivity, and the interest rate. The STP vs. SOC debate is introduced and seen to relate to the distinction between efficiency and social pricing. It is argued that because the concept of a social discount rate is ultimately related to the effective power (or lack of power) of the public sector, the notion of ‘efficiency’ price must implicitly assume either that global savings and its distribution between private and public sectors is optimal, or else ignore the question altogether. Finally some reasons are given for treating the economic discount rate as a pure rationing device. The chapter concludes with a brief section on measuring the effective cost of adding to public financial resources through borrowing.