Discounting procedures for environmental (and other) projects: A comment on Kolb and Scheraga

Jonathan A. Lesser and Richard O. Zerbe
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Jonathan A. Lesser: Senior Economist at Green Mountain Power Corporation, South Burlington, Vermont, Postal: Senior Economist at Green Mountain Power Corporation, South Burlington, Vermont
Richard O. Zerbe: Professor of Public Affairs and Adjunct Professor of Law, Graduate School of Public Affairs, University of Washington, Postal: Professor of Public Affairs and Adjunct Professor of Law, Graduate School of Public Affairs, University of Washington

Journal of Policy Analysis and Management, 1994, vol. 13, issue 1, 140-156

Abstract: We compare two alternative methods to discount the costs and benefits of environmental projects. These are (1) the shadow price of capital, which can be practically expressed by using the cost of capital and thus the discount rate on government bonds, and (2) the two-stage discounting procedure advocated by Kolb and Scheraga. We suggest that the two-stage approach is in many cases inconsistent with the shadow price of capital approach and will therefore lead to misallocations of resources. We further argue that the use of the cost of capital as the discount rate will be easier than the two-stage procedure, will yield results that are consistent with the shadow price of capital approach, and will be justified by the potential Pareto criterion. Finally, use of the shadow price of capital approach has a potential for achieving considerable consensus in practice as well as in theory, a result that could considerably enhance project evaluation.

Date: 1994
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jpamgt:v:13:y:1994:i:1:p:140-156

DOI: 10.2307/3325094

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