Defining The Discount Rate Trajectory For The Evaluation Of Water Stress Mitigation Policies And Projects

Yiannis Kountouris () and Phoebe Koundouri ()

No 907, DEOS Working Papers from Athens University of Economics and Business

Abstract: Policy appraisal is an important element of applied economic welfare analysis that combines economic theory and practice to inform policy decision making. The purpose of a project's economic analysis is to evaluate its efficiency and its effects on social welfare. Typically a policy will be applied if the economic benefits from its implementation outweigh the total costs from designing and applying the policy. Furthermore, when several policies are evaluated, ideally the one that maximizes the benefits on aggregate welfare should be identified and implemented. Policies and especially those relating to environmental decisions are not to be assessed for the effects they have in a single period. These policies entail streams of costs and benefits for decades or even centuries. This chapter deals with the evaluation of long term policies and the controversies arising therein. We discuss the existing justifications for using a declining discount rate when evaluating long term projects and then we proceed to discuss the estimation of declining discount rates (for an application of declining discounting in a policy making context see Groom et al 2002). Drawing from case studies from the AquaStress Integrated Project, we stress the importance of declining discount rates on water resources management.

Date: 2009-12-30
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