Philosophy Revisited: B-C Analysis and Intergenerational Preferences

    The issue: Does investing in projects that maximize NPV, discounting at the opportunity cost of capital, harm future generations?  One might think that human preferences for current over future consumption that lead to a positive interest rate harm future people, since benefits tend to come later than costs and hence are more heavily discounted.  This might suggest that B-C analysis is biased against the future, particularly important in the environmental context, since we might be making decisions with irreversible consequences (we'll return to irreversibilities).  Consider the following projects (with 10% discount):

                                        Period 1             Period  2             Period 3
Project A                        -$1,000                 -0-                   +$1,210
Project B                        -$1,000               +$100                +$1,100
Project C                        -$1,000              +$1,100                -0-
Project D                        -$1,000
                            and    +$1,000

What is the NPV of these projects?   Answer: zero--they are all equally good, whether the money is all spent now (Project D) or is invested to help only distant "generations" (using years to keep numbers simple, but could figure out the numbers for very distant outcomes).  Yet, we have strong preferences among them--why?  Because we care about who receives the benefits and pays the costs; this is precisely analogous to arguing that a project, within a period, having B > C "should" be undertaken--but what if its benefits accrue to the rich and the costs are paid by the poor?  Substitute "one generation" for "the rich" and "another generation" for "the poor" and you can see the nature of the problem.  Is there any reason to feel that future generations are likely to be "poorer" than current generations?  The answer depends, in part, on whether you are a Doomster or a Boomster.  "Boomsters" might argue that future generations, following the past, will be much better off than the current generation (technological progress and bequests), while "Doomster" might argue that future generations will be poorer--and this is where "irreversibilities" enter.  What if future generations are richer but cannot experience a lost species (we kill the whales or cut all the redwoods)?  Can we know anything about how much the future will value a lost species (how much of their wealth they would give up to get it back, if they could)?  Clearly, apart from irreversibilities and/or if the future "doesn't care," concern for future generations would suggest that we invest in projects that offer the future the greatest wealth (high return projects), for then they will have the greatest ability to buy what they want (including environmental quality, as in the recent past).  This argues strongly against using abnormally low (or even zero, as some extreme environmentalists favor) interest rates for environmental projects--we would give the future a "nice"--as we define it--environment but they might be very much poorer!  That is, they will have a lower utility--and would, if they could be around now, chastize us for picking the wrong bundle of environmental and other goods for them!
    Note: as with projects at a point in time, if the benefits are greater than the costs for a project, compensation could occur (reduced or increased bequests, for example) to make all generations better off.  Note further that businesses do not have to worry about these issues (as with a point in time) since a dollar's worth of demand (appropriately discounted and corrected for inflation) is the same regardless of the generation it comes from.  Hence, private investments embed a "neutrality" toward generations just like businesses are "neutral" toward who buys their goods at a point in time (rich and poor pay the same price for bread).