Notes

Finally, it must be emphasized that in instances where market incompleteness clearly is of first order importance, it may be possible for economists to identify compelling reasons to use alternatives to market discount rates. For example, for policies whose payoffs extend beyond the time horizons usually covered by financial markets, and whose benefits accrue primarily to unborn generations, the choice of discount rates is far from obvious. However, discounting at the risk-free rate is unlikely to be the answer either. For example, in the current discussion over how to discount the benefits from abating greenhouse gasses, Arrow (1995) argues for using a discount rate of zero based on considerations of intergenerational fairness. Given the growing scope and scale of government investment activities and the high stakes involved, a return by more academic economists to these fundamental questions would appear to a valuable investment for society in itself.