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Future Generations and Discounting Rules in Public Sector Investment Appraisal

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  • E Kula

    (Centre for Development Studies, University College of Swansea, Swansea SA2 8PP, Wales)

Abstract

In public sector investment appraisal the widely recommended ‘net present value’ criterion does not treat future generations in the same way as present members of society. Because of the discounting rules applied in evaluating a government investment project by means of the net present value criterion, a decisionmaker inevitably discriminates against the future members of society by giving less weight to their share of benefits (or costs) which will accrue to them at some future date. He does this simply because they are not alive at the precise time when the decision is made. The more distant they are in time from the present generations, the less weight is attached to their shares. As a consequence, in evaluating long-term investment projects, particularly those in which the benefits and costs are separated from each other with a long time interval, the net present value rules guide the decisionmaker to maximise the utility of present generations at the expense of the future ones. If the decisionmaker wishes to treat all generations, present and future equally, as he should, instead of the net present value criterion a different method of appraisal is proposed, and is called ‘the sum of discounted consumption flows’.

Suggested Citation

  • E Kula, 1981. "Future Generations and Discounting Rules in Public Sector Investment Appraisal," Environment and Planning A, , vol. 13(7), pages 899-910, July.
    • Handle: RePEc:sae:envira:v:13:y:1981:i:7:p:899-910
    DOI: 10.1068/a130899
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    References listed on IDEAS

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    1. Stephen A. Marglin, 1963. "The Social Rate of Discount and The Optimal Rate of Investment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 77(1), pages 95-111.
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    2. Wayne Visser & Alastair Macintosh, 1998. "A short review of the historical critique of usury," Accounting History Review, Taylor & Francis Journals, vol. 8(2), pages 175-189.
    3. Price, Colin, 6. "Optimal Rotation under Continually – or Continuously – Declining Discount Rate," Scandinavian Forest Economics: Proceedings of the Biennial Meeting of the Scandinavian Society of Forest Economics, Scandinavian Society of Forest Economics, issue 42, April.
    4. Colin, Price, 2011. "Optimal rotation with declining discount rate," Journal of Forest Economics, Elsevier, vol. 17(3), pages 307-318, August.
    5. Brazee, Richard J., 2018. "Impacts of declining discount rates on optimal harvest age and land expectation values," Journal of Forest Economics, Elsevier, vol. 31(C), pages 27-38.
    6. Young, Ralph, 1992. "Evaluating Long-Lived Projects: The Issue Of Inter-Generational Equity," Australian Journal of Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 36(3), pages 1-26, December.
    7. R. A. Sharma & M. J. McGregor, 1993. "The Social Discount Rate For Land‐Use Projects In India: Reply," Journal of Agricultural Economics, Wiley Blackwell, vol. 44(1), pages 166-167, January.
    8. Dagenais, Denyse L., 1995. "L’économiste et les confitures," L'Actualité Economique, Société Canadienne de Science Economique, vol. 71(3), pages 277-290, septembre.

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