By D. W. Pearce (auth.)
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Extra resources for Cost-Benefit Analysis
The current generation may exhibit concern for future generations, but that concern is not 'wholly altruistic'. As we have seen, a discount rate for public-sector decision-making can be obtained by: 1. adoption of a direct estimate of a (social) time preference rate, or 2. adoption of a direct estimate of an opportunity cost rate or 3. some mixture of both. The foregoing discount rates are generally referred to as 'efficiency' rates because they have a close relationship to the economist's concept of an efficient allocation of resources both within any time period and through time.
This is given by a ranking of PV(B) divided by PV(C), or the so-called benefitcost ratio. Discounting and future generations Regardless of how we derive a discount rate, it it likely to produce a positive value. Suppose now that the project in question has benefits that accrue for thirty years but costs which, while small each year, accrue for 500 years. This might typify, say, the problem of investing in the safe storage of nuclear fuel waste and other wastes from nuclear power stations. The problem, in CBA terms, would present itself as comparing the costs of the storage system (say placing the waste in glassified blocks, inside metal containers and then locating them in depositories deep underground) with the benefits in terms of the reduced risk of exposure to radioactivity.
Hence the earlier the £1 accrues, the more they prefer it. On either, or both, of these criteria, individuals will have positive time preference - they will prefer now to later. If we now recall the value judgements underlying our conventional CBA, we observe that the first of these, consumer sovereignty, dictates that consumer preferences matter. Thus we cannot logically exclude individuals' preferences about the incidence of costs and benefits through time. In turn this means that we must 'discount' future benefits and costs.
Cost-Benefit Analysis by D. W. Pearce (auth.)