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Discounting Environmental Goods

Gareth Green and Timothy J. Richards

No 5345, EcoMod2013 from EcoMod

Abstract: Environmental policy decisions are dynamic in nature. Assumptions on the functional structure and rate of discounting have significant impacts on policy decisions regarding when to act and how much to invest. Environmental benefit-cost analysis historically has employed exponential discounting structure and market discount rates for evaluating environmental policy. Though here has been significant research in the lab indicating that discount functions may be hyperbolic, the research has focused primarily on monetary rewards (Lowenstein and Prelec 2002; Benhabib, Bisin and Schotter 2010). However, there has only been limited research indicating that environmental goods may also be discounted in a hyperbolic manner (Viscusi and Huber 2008; Karp 2007). We examine the structure and rate of discount functions for a variety of environmental goods to determine if people discount different environmental goods differently. We estimate a flexible discount function (Prelec) that allows us to determine the structure and rate of discounting for different types of public goods. We employ a front-end delay in the reward, similar to Anderson et al, to insure that any evidence of hyperbolic discounting is not due to having an immediate payoff. Though there have been several studies that have looked at discounting of public goods (Viscusi, Huber and Bell) and public bads (Svenson and Karlson 1989; Nikolaij and Hendrickx 2003; Hendrickx and Nicoloaij 2004; and Bohm and Pfister 2005), we examine discounting behavior for different types of public goods within the same sample. We select the public goods such that benefits differ in their level of use value and time frame of occurrence. We use three different types of public goods: improvements in public parks, improvements in water quality for aquatic life, and reductions in carbon emissions. Improvements in parks and water quality are similar in time frame, but differ in use value. Improvements in water quality and reductions in carbon emissions are similar in use value, but differ in time frame. Examining these three different public goods with slightly different characteristics will allow us to determine how people discount different types of public goods, which critical to understanding public policy choices toward environmental goods. Preliminary results indicate that people discount different types of goods differently. Mainly that people place a higher discount rate on environmental goods with use value and a lower discount rate on environmental goods with non-use value. We also find that environmental discount rates are quasi-hyperbolic in structure.

Keywords: United States; Energy and environmental policy; Agent-based modeling (search for similar items in EconPapers)
Date: 2013-06-21
New Economics Papers: this item is included in nep-agr, nep-cmp, nep-env and nep-res
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