Future Generations and Discounting Rules in Public Sector Investment Appraisal

Abstract

In public sector investment appraisal the widely recommended ‘net present value’ criterion does not treat future generations in the same way as present members of society. Because of the discounting rules applied in evaluating a government investment project by means of the net present value criterion, a decisionmaker inevitably discriminates against the future members of society by giving less weight to their share of benefits (or costs) which will accrue to them at some future date. He does this simply because they are not alive at the precise time when the decision is made. The more distant they are in time from the present generations, the less weight is attached to their shares. As a consequence, in evaluating long-term investment projects, particularly those in which the benefits and costs are separated from each other with a long time interval, the net present value rules guide the decisionmaker to maximise the utility of present generations at the expense of the future ones. If the decisionmaker wishes to treat all generations, present and future equally, as he should, instead of the net present value criterion a different method of appraisal is proposed, and is called ‘the sum of discounted consumption flows’.