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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 9: How Should We Discount the Future? An Environmental Perspective

Michael D. Young and Darla Hatton MacDonald


Michael D. Young and Darla Hatton MacDonald SUMMARY When pushed to the limit, the use of conventional discount rate methodologies reveals a number of absurd propositions. This chapter seeks to identify the reasons why conventional discounting methods that involve long-term decisions do not produce the information necessary and sufficient to make a sensible recommendation to a decision maker. The chapter then goes on to explore a range of issues associated with decisions the management and protection of renewable resources. It begins by recognizing that discounting is important and that one cannot validly recommend that a zero discount rate be used. Having made this case, Australian investments in salinity interception are used as a case study to reveal the nature of many problems presented. In this case, the investments being made postpone and compound salinity impacts by several hundred years – all the benefits occur in a shorter time period. The effects of macroeconomic policy on discount rate selection and through this on likely future environmental conditions are then explored. Having dealt with issues associated with risk and uncertainty, the chapter explores a range of techniques and proposed solutions that are in various stages of development. These options include constraining the range of permitted analyses, and making adjustments to account for expected changes in the future population of a nation and to account for the preferences of populations as they age. Increased use of sensitivity analyses that explore the sensitivity of a benefit–cost analysis to the range of approaches explored is...

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