Edited by John Weiss and David Potts
Chapter 7: Discounting: Does it Ensure Intergenerational Equity?
Erhun Kula INTRODUCTION The social rate of discount is one of the most important parameters in economics since it is required in a number of situations. First, it is required for determining the optimal rate of saving or how much a utility-enhancing society should save out of the income that it generates (Ramsey, 1928). Second, it is needed to determine the depletion rate of non-renewable resources, such as fossil fuel deposits. This is sometimes referred to as the cake-eating model (Hotelling, 1931; Solow, 1974). Third, it is required for the calculation of the social opportunity cost of public resources used for a multitude of purposes (Marglin, 1963). Last but not least, in cost– benefit analysis, it is needed for the appraisal of public sector projects. For example, a project may qualify by yielding a positive net present value at a 5 per cent discount rate, but the same project may fail at a 6 per cent rate. There are a number of important issues in the discounting debate such as the distinction between private and social rates of discount, determining the correct magnitude of the social rate, taking account of the interests of both present and future generations and, last but not least, determining the theoretical foundation for the social rate. There have been many contributions and a number of different viewpoints expressed on these issues. It can be argued that in a world of perfect competition a single interest rate can equate the marginal time preference rate of savers...
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