Evaluating Long-Lived Projects: The Issue Of Inter-Generational Equity

The role of the discount rate in benefit-cost analysis is reviewed, and its impact considered. A positive rate clearly 'tilts the balance overwhelmingly against generations in the distant future'. In this context, the issue of inter-generational equity is discussed, and it is concluded that although a positive rate representing social time preference or opportunity cost is appropriate when considering questions of economic efficiency, this is not the case when equity questions are being examined. In the case of irreversible change, an extreme example of inter-generational inequity, there may be no alternative to a constrained optimisation approach, where the constraint is determined by an ethical decision. A range of approaches for analysing the issue of inter-generational equity are canvassed and it is concluded that efficiency and equity questions need to be dealt with separately. If the analysis of the options on each issue are set out clearly, then policy makers will be better placed to make an informed and responsible decision.