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Economics and the Future

Time and Discounting in Private and Public Decision Making

Edited by David J. Pannell and Steven G.M. Schilizzi

Economics and the Future tackles the discounting issue from a number of angles, ranging from relatively short-term private financial decisions, to very long-term public issues spanning generations. The authors present differing perspectives and original ideas in a style that remains accessible while addressing some of the more difficult questions about discounting in theory and practice. It reveals that the economic issues regarding time are embedded in a broader social, ethical and philosophical context.
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Chapter 1: Time and Discounting in Economic Decision Making

David J. Pannell and Steven G.M. Schilizzi


David J. Pannell and Steven G.M. Schilizzi SUMMARY Both in private and public spheres, decision makers must grapple with the problem of how to compare costs and benefits that occur at different times. In private decision making, the use of discounting to convert future values into present values is well supported theoretically, and is relatively uncontroversial in practice. Discounting implicitly involves a comparison between a prospective investment and an existing benchmark investment, with the discount rate being the rate of return for the benchmark. Discounting for long-term public investments is less clear-cut. A range of perspectives on the matter can be found in the existing literature and in this book. The application of standard discounting methods appears to some to result in decisions that make inadequate provision for the welfare of future generations. On the other hand, it can be argued that a failure to discount adequately can also have adverse effects on future generations. Overall the issues around long-term discounting are complex, multifaceted, and not fully resolved. A complete resolution of the issues will require integration of efficiency, equity and uncertainty considerations. 1.1 INTRODUCTION The basic question addressed in this book is, how should we assign a present value to benefits and costs that occur in the future? In other words, how, and to what extent, should future benefits and costs be discounted in the present? The question is multifaceted, complex, and not solely economic. For example, the answer may depend to some extent on elements of religion, biology...

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