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

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  • Yiannis Kountouris
  • Phoebe Koundouri

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.

Suggested Citation

  • Yiannis Kountouris & Phoebe Koundouri, 2009. "Defining The Discount Rate Trajectory For The Evaluation Of Water Stress Mitigation Policies And Projects," DEOS Working Papers 0907, Athens University of Economics and Business.
    • Handle: RePEc:aue:wpaper:0907
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    File URL: http://wpa.deos.aueb.gr/docs/2009.WATER.STRESS.MITIGATION.POLICIES.pdf
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    References listed on IDEAS

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    1. Christian Gollier & Phoebe Koundouri & Theologos Pantelidis, 2008. "Declining discount rates: Economic justifications and implications for long-run policy [‘Regime switches in interest rates’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 23(56), pages 758-795.
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    4. Gollier, Christian, 2002. "Time Horizon and the Discount Rate," Journal of Economic Theory, Elsevier, vol. 107(2), pages 463-473, December.
    5. Phoebe Koundouri & Theologos Pantelidis & Ben Groom & Ekaterini Panopoulou, 2007. "Discounting the distant future: How much does model selection affect the certainty equivalent rate?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(3), pages 641-656.
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