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Low discount rates and insignificant environmental values

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  • Price, Colin
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    Abstract

    Difference between the discount rate on consumption and the rate of return on investment is often taken to prevent the former's being used as a social discount rate. Yet techniques have long been known for incorporating both these rates in a shadow price of investment funds. Assumptions about the proportion of investment revenues saved and reinvested are crucial in determining whether a low discount rate favours or discriminates against long-term environmental values. Even a moderate saving rate may make the shadow price of funds indefinitely large. The conceptually correct discount rate then becomes the growth rate of investment funds, and the relative value of environmental effects becomes zero. Stochastic variation in rate of return makes this result more likely. Such an outcome may be avoided by setting reinvestment to zero, or assuming convergence of rates of return and discount, but no firm justification exists for these stratagems. However, various reasonable assumptions about environmental costs - especially, that they embody an investment element, or require adequate compensation to be paid - may make such costs indefinite also, and therefore capable of standing against indefinite values of investible funds.

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    Bibliographic Info

    Article provided by Elsevier in its journal Ecological Economics.

    Volume (Year): 69 (2010)
    Issue (Month): 10 (August)
    Pages: 1895-1903

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    Handle: RePEc:eee:ecolec:v:69:y:2010:i:10:p:1895-1903

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    Web page: http://www.elsevier.com/locate/ecolecon

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    Keywords: Discounting Shadow price of investment funds Environmental values Compensation;

    References

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    1. Sandmo, Agnar & Dreze, Jacques H, 1971. "Discount Rates for Public Investment in Closed and Open Economies," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 38(152), pages 395-412, November.
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    3. Lind, Robert C., 1990. "Reassessing the government's discount rate policy in light of new theory and data in a world economy with a high degree of capital mobility," Journal of Environmental Economics and Management, Elsevier, vol. 18(2), pages S8-S28, March.
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    6. C. Price, 1991. "Do High Discount Rates Destroy Tropical Forests," Journal of Agricultural Economics, Wiley Blackwell, Wiley Blackwell, vol. 42(1), pages 77-85.
    7. Lyon, Randolph M., 1990. "Federal discount rate policy, the shadow price of capital, and challenges for reforms," Journal of Environmental Economics and Management, Elsevier, vol. 18(2), pages S29-S50, March.
    8. Nichols, Alan, 1971. "Normalisation Procedure for Public Investment Criteria: Further Comment," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 81(321), pages 122-25, March.
    9. Nichols, Alan, 1969. "On the Social Rate of Discount: Comment," American Economic Review, American Economic Association, American Economic Association, vol. 59(5), pages 909-11, December.
    10. Sjaastad, Larry A & Wisecarver, Daniel L, 1977. "The Social Cost of Public Finance," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 513-47, June.
    11. Fisher, Anthony C & Krutilla, John V, 1975. "Resource Conservation, Environmental Preservation, and the Rate of Discount," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 89(3), pages 358-70, August.
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    13. Harry F. Campbell, 1981. "Shadow-Prices for the Economic Appraisal of Public Sector Expenditures," Canadian Public Policy, University of Toronto Press, vol. 7(3), pages 395-398, Summer.
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    Cited by:
    1. Colin, Price, 2011. "Optimal rotation with declining discount rate," Journal of Forest Economics, Elsevier, Elsevier, vol. 17(3), pages 307-318, August.
    2. AlekneviÄienÄ—, Vilija & StonÄiuvienÄ—, Neringa & ZinkeviÄienÄ—, DanutÄ—, 2013. "Determination of the fair value of a multifunctional family farm: a case study," Studies in Agricultural Economics, Research Institute for Agricultural Economics, Research Institute for Agricultural Economics, vol. 115(3), December.

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