Discounting and Intergenerational Equity 1

A precise definition of the term "intergenerational equity" is very difficult and involves not only economic but ethical, moral and legal questions. The chapter begins by stating a few questions that are often raised in discussions of intergenerational equity. Discussions of intergenerational equity among economists usually focus on whether irreversible damages will occur from current exploitation of exhaustible resources. Investment decisions are often made on the basis of an economic criterion known as the maximization of Net Present Value (NPV). The use of the NPV rule, although widely accepted on grounds of efficiency, has often been criticized on the grounds of equity. Many conservationists argue that the discount rate for conservation projects should be much lower than the rate for other investment programs. Since intergenerational equity issues are extremely difficult to quantify, it may be prudent to err on the conservative side -- that is, to invest more in soil conservation than can be justified by short-run economic criteria.