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Discounting procedures for environmental (and other) projects: A comment on Kolb and Scheraga
Author(s) -
Lesser Jonathan A.,
Zerbe Richard O.
Publication year - 1994
Publication title -
journal of policy analysis and management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.898
H-Index - 84
eISSN - 1520-6688
pISSN - 0276-8739
DOI - 10.2307/3325094
Subject(s) - discounting , sociology , economics , finance
We compare two alternative methods to discount the costs and benefits of environmental projects. These are (1) the shadow price of capital, which can be practically expressed by using the cost of capital and thus the discount rate on government bonds, and (2) the two‐stage discounting procedure advocated by Kolb and Scheraga. We suggest that the two‐stage approach is in many cases inconsistent with the shadow price of capital approach and will therefore lead to misallocations of resources. We further argue that the use of the cost of capital as the discount rate will be easier than the two‐stage procedure, will yield results that are consistent with the shadow price of capital approach, and will be justified by the potential Pareto criterion. Finally, use of the shadow price of capital approach has a potential for achieving considerable consensus in practice as well as in theory, a result that could considerably enhance project evaluation.