Determinants of Investment

It is true that the social welfare considerations exert the significant influence o the investment decisions of the public sector. All the same, the public authorities have also to choose between different projects calling for public investment. All the desirable projects cannot be undertaken; there it is necessary to come to a decision on the basis of which projects are found most worthwhile. For this purpose, the use is being made of cost-benefit analysis by the public authorizes. Cost-benefit techniques attempt to assess the social benefit refer those satisfaction enjoyed by the community which are not fully revealed in the revenues earned by an enterprise.

For example, it will not be correct to evaluate the benefit realized by the government officials in terms of rent realized from them for the various houses constructed by the government for its staff. Obviously, the social benefit far exceeds the benefit expressed by revenues. Therefore, the decision to invest in house cannot be passed on revenue considerations, it will have to take account of the other benefits. Similarly, the money costs may not be real costs of any project to the society. Considerations like. “Smoke from the oil refinery at Mathura may adversely affect the Taj Mahal at Agra,” considerably weigh in evaluating the real costs of a project in the public sector.

In short, in the public sector, investment decisions are motivated by profitability in terms of surplus of social benefits over social costs.

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