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Should moral sentiments be incorporated into benefit-cost analysis? An example of long-term discounting

  • Richard Zerbe
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    There are currently debates both about the ability to measure the value of moral sentiments and the nature of benefit-cost analysis. Moral sentiments can be reasonably measured in many situations and their consideration can improve benefit-cost analysis in any case. This argument is presented by briefly considering measurement issues and the example of discount rates for long-term projects in the context of a benefit-cost analysis. The suggestion has been made that it is immoral and unethical to undervalue future generations by discounting, and recently the federal government has recognized these moral concerns about discounting. Yet, the logic of wealth maximization requires discounting. This dilemma may be resolved by realizing that the problem is one of larger concern over missing values that arise from the general tendency of benefit-cost analyses to ignore ethical values. This deficiency is overcome by a modification to benefit-cost analysis (called KHM, for Kaldor-Hicks-Moral) that incorporates moral values directly into the benefit-cost analysis and, inter alia, recognizes all values for which there is a willingness to pay. Insofar as the current generation is willing to pay to avoid future moral harm, this is incorporated into the KHM approach. This article illustrates how KHM incorporates missing values and shows how compensation and mitigation can eliminate or reduce the concern over moral harm to future generations. Thus it is not necessary to use lower discount rates to recognize moral harm. Copyright Springer Science + Business Media, Inc. 2004

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    File URL: http://hdl.handle.net/10.1007/s11077-005-5750-3
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    Article provided by Springer in its journal Policy Sciences.

    Volume (Year): 37 (2004)
    Issue (Month): 3 (December)
    Pages: 305-318

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    Handle: RePEc:kap:policy:v:37:y:2004:i:3:p:305-318
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    1. Per-Olov Johansson, 1992. "Altruism in cost-benefit analysis," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 2(6), pages 605-613, November.
    2. Palfrey, Thomas R & Prisbrey, Jeffrey E, 1997. "Anomalous Behavior in Public Goods Experiments: How Much and Why?," American Economic Review, American Economic Association, vol. 87(5), pages 829-46, December.
    3. Kahneman, Daniel & Knetsch, Jack L., 1992. "Valuing public goods: The purchase of moral satisfaction," Journal of Environmental Economics and Management, Elsevier, vol. 22(1), pages 57-70, January.
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