Time and Discounting in Private and Public Decision Making
Edited by David J. Pannell and Steven G.M. Schilizzi
Chapter 7: Discounting the Distant Future Using Short Time Horizons: Investments with Irreversible Benefits
Steven G.M. Schilizzi Modelling inter-temporal concern is [yet] to be transformed from an art to a science. Jack Pezzey (1997, p. 464) SUMMARY From the literature it appears that, at least to this day, the problem of valuing costs and benefits in the distant future is an intractable one. Examples relevant to this problem include the consequences from today’s activities on biodiversity, global warming, and nuclear waste storage. By the distant future is meant any time beyond 25−30 years, a period we may call the economic time horizon, beyond which no commercial transactions usually occur. One reason for the difficulty is that uncertainties are so great at that distance as to render any deterministic valuation meaningless. But the problem persists even if uncertainties are small. A major stumbling block is known as the ‘commitment problem’, whereby investments made in the interest of distant generations can easily be ‘stolen’ by intermediate generations. This chapter explores a way round this hurdle by introducing the idea of investments with irreversible benefits (not to be confounded with the notion of irreversible investments). The advantage of the approach proposed here is that it allows for long-term consequences to be addressed while making decisions within a 30 year time horizon. The idea is implemented by building a model investigating the optimal containment of radioactive waste in a world without uncertainties. The conclusion is that it is possible in some situations for current generations to cater for the interests of the far future 77 78 Economics...
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