Non-Marginal Cost-Benefit Analysis and the Tyranny of Discounting

Koen Vermeylen
Additional contact information
Koen Vermeylen: University of Amsterdam

No 13-203/VI, Tinbergen Institute Discussion Papers from Tinbergen Institute

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.

Keywords: climate change; cost-benefit analysis; discounting; WTP; WTA (search for similar items in EconPapers)
JEL-codes: D61 E13 H43 Q51 Q54 (search for similar items in EconPapers)
Date: 2013-12-16
New Economics Papers: this item is included in nep-ene, nep-env, nep-mac and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://papers.tinbergen.nl/13203.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20130203

Access Statistics for this paper

More papers in Tinbergen Institute Discussion Papers from Tinbergen Institute Contact information at EDIRC.
Bibliographic data for series maintained by Tinbergen Office +31 (0)10-4088900 ().