Time and Discounting in Private and Public Decision Making
Edited by David J. Pannell and Steven G.M. Schilizzi
Chapter 6: Reconsidering Reconsidered: Why Sustainable Discounting Need Not be Inconsistent Over Time
John C.V. Pezzey SUMMARY Economists assess dollar costs and benefits in the future by discounting them. Each cost or benefit is multiplied by a discount factor appropriate to the time when it occurs, and then total discounted costs are subtracted from total discounted benefits to get net present value. The rate by which the discount factor declines over time is the discount rate. Economists also apply discounting to costs and benefits measured in terms of wellbeing, and the discount rate is then called (the rate of) impatience. Whether or not impatience should be constant over time is important to long-run development theory. If non-renewable resources are essential inputs to production, then the return on capital investment will eventually decline towards zero, and thus fall below any constant rate of impatience. Once this happens, and assuming the economy always maximizes net present value, then wellbeing will be falling over time. So there is considerable interest in ‘sustainable discounting’: using a falling rate of impatience that stays below the return on capital investment, and thus gives a sustainable development of, rather than an eventual fall in, wellbeing. However, any non-constant rate of impatience typically causes inconsistency, where people make a plan now for their entire future, but on reconsidering it later, want to change their plan. I show diagrammatically that inconsistency occurs only if people use a relative time approach to reconsidering, by using a discount factor that depends only on how far off future costs and benefits are relative to the...
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