The Economics of Natural Environments: Studies in the Valuation of Commodity and Amenity Resources

By John V. Krutilla; Anthony C. Fisher | Go to book overview

CHAPTER 4
FURTHER ANALYSIS OF IRREVERSIBILITY: DISCOUNTING, INTERGENERATIONAL TRANSFERS, AND UNCERTAINTY

In chapter 3 it was suggested that problems posed by the irreversibility of a decision to develop a natural environment, along with the unusual degree of uncertainty surrounding evaluation of the alternatives, deserve additional attention. While these problems are profoundly difficult and are at best only partially resolved, in this chapter we shall address the relevant issues to which they give rise.


1. DETERMINING THE DISCOUNT RATE

In its simplest expression, a dollar currently in hand has a higher present worth than one promised to be available only after a time lapse. Similarly, the present value of benefits today is greater than equivalent benefits, reckoned in constant dollars, expected to be received in the future. The recognized method of obtaining the present value at any moment in time is to weight the net returns from an investment by a discount factor. The discounted value per dollar should ordinarily be larger for near term returns and smaller for those more distant. That is, it is a decreasing function of time such as e-ρt, where ρ is some positive number, the discount rate. Clearly the discount factor weight, and hence the relative importance of a future benefit or cost, will be determined by the rate ρ. There is a substantial literature on the determination of the discount rate for public projects. Moreover, it has been suggested that the conservation of exhaustible natural resources might be achieved through lowering the discount rate ( Pigou, 1932). While it is possible to review the relevant discussion in only the sketchiest manner here, we do so in this section in order to provide both the background to understand this problem and some explanation for the choice of discount rates in our empirical procedures. In section 2 we enter more deeply into the intergenerational distribu

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