Public Economics, Public Projects, and their Funding

Abstract

This paper illustrates the contribution of public economics to the analysis of public projects. The illustrations pertain to peak-load pricing (electricity) and to second-best pricing under a budget constraint (subways), also taking into account the pricing of substitutes (rail versus canals, fixed link versus air or ferries). The paper next reviews some difficulties in evaluating costs and benefits (for the Channel tunnel), compares briefly private versus public implementation, then turns to funding. After reviewing the pricing of derivatives in the Capital Asset Pricing Model and the computation of risk premia for public projects, the case for funding public projects on world capital markets is presented and applied to the denomination of Third World debt. The paper ends on a plea to consider the merits of a “World Insurance Agency for Development”.