ABSTRACT

A discount rate is a price used to compare future and present goods. This paper addresses the following issue: When the implications of conventional benefit-cost tests are ethically unacceptable, how might they be modified? I examine this question by employing different rules in an empirical model of global warming. The major conclusion is that ad hoc manipulation of discount rates is a very poor substitute for policies that focus directly on the ultimate objective. Moreover, within the class of policies that distort discount rates, targeted distortions in the specific sectors are less harmful than distortions of discount rates in the entire economy. The best approach will generally be to identify the long-term objective and to directly override market decisions or conventional benefit-cost tests to achieve the ultimate goals. Focusing on ultimate objectives shows trade-offs explicitly, makes the cost of violating benefit-cost rules transparent, and allows public decisionmakers to weigh options explicitly rather than allowing technicians to hide the choices in abstruse arguments.