REFLECTIONS ON THE FOUNDATIONS OF ECONOMIC VALUATION

Abstract

This paper provides a brief review of the measures developed to achieve the goal of economic evaluation of public projects. The limitations of the Kaldor–Hicks criterion are highlighted and these issues lead to the development of the discounted present value (DPV) method and the compounded terminal value (CTV) method. However, the latter methods were not without problems. It is demonstrated that using DPV or CTV to evaluate certain public projects produces exorbitantly small DPVs or exorbitantly large CTVs, which would lead to a manifestly perverse ranking if adopted. A new method of evaluating these public projects, known loosely as the corrected equivalent present value method, is proposed to alleviate the problems of DPV and CTV.