Discounting costs and effects: a reconsideration

Abstract

Using a simple societal utility function--giving equal weight to current and future generations-it is concluded that costs need to be discounted on the basis of the expected increase in income and the marginal utility of consumption, and that effects need to be discounted on the basis of the expected increase in health and the marginal utility of health. It is derived that both rates need to be equal when assuming a kind of perfect market, where growth rates are determined by the societal utility function. It is argued that this is an extremely heroic assumption and that different discount rates may be needed. Additionally, the traditional 'inconsistency arguments' of Weinstein and Stason and of Keeler and Cretin are reconsidered. Within the context presented earlier, the first inconsistency only emerges when a growth equilibrium is assumed, reinforcing the arguments put forward before. The Keeler and Cretin paradox is reconsidered by showing that absolutely no paradox emerges when programs are not supposed to stop after a year but are supposed to continue indefinitely. The conclusion is drawn that non-believers in market mechanisms assuring an optimal social policy, need to reconsider the use of their discount rates.

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“…[1][2][3][4] Some theorists have argued for low or even no discounting of health outcomes, 3 arguing, for example, that a life saved later is just as important as a life saved now. Others have advocated using the same discount rate for health and money.…”

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“…Several reasons why people discount money do not apply (or apply less) to health. For example, the growth rate of GDP tends to be larger than the growth rate of health,13 which means that the value of health in terms of consumption increases and which may justify a lower discount rate for health (Van Hout 1998; Gravelle and Smith 2001; Claxton et al 2011). Indeed, empirical evidence suggests that the value of a statistical life increases with income and, hence, increases over time as income grows (Viscusi and Aldy 2003; Hammitt and Robinson 2011).…”