Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2013-12-16
Number: 13-203/VI
Author-Name: Koen Vermeylen
Author-Workplace-Name: University of Amsterdam
Title: Non-Marginal Cost-Benefit Analysis and the Tyranny of Discounting
Abstract: This paper uses the Kaldor-Hicks compensation principle to compute the present value (PV) of a non-marginal future event. Three theoretical results stand out: First, decreasing returns to capital create a wedge between the PV of future generations' willingness to pay (WTP) and the PV of their willingness to accept compensation (WTA); second, the discount rates implicit in the computation of the PVs are endogenous, and rising (declining) over time for the future generations' WTP (WTA); and third, decreasing returns to capital may make it impossible to compensate future generations according to their WTA, effectively defeating the tyranny of discounting. A back-of-the-envelope calibration suggests that this last result is realistic in the case of climate change. A cost-benefit analysis based on the Kaldor-Hicks compensation principle may therefore be impossible if futu re generations are entitled to a world without climate change; and an environmental trust fund - no matter how large it is - may be insufficient to adequately compensate future generations.
Classification-JEL: D61, E13, H43, Q51, Q54
Keywords: climate change, cost-benefit analysis, discounting, WTP, WTA
File-Url: https://papers.tinbergen.nl/13203.pdf
File-Format: application/pdf
File-Size: 367581 bytes
Handle: RePEc:tin:wpaper:20130203