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Pricing the Planet's FutureThe Economics of Discounting in an Uncertain World$
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Christian Gollier

Print publication date: 2012

Print ISBN-13: 9780691148762

Published to Princeton Scholarship Online: October 2017

DOI: 10.23943/princeton/9780691148762.001.0001

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Evaluation of Non-marginal Projects

Evaluation of Non-marginal Projects

Chapter:
(p.215) 14 Evaluation of Non-marginal Projects
Source:
Pricing the Planet's Future
Author(s):

Christian Gollier

Publisher:
Princeton University Press
DOI:10.23943/princeton/9780691148762.003.0014

This chapter shows that the cost-benefit analysis can be used only if the actions under scrutiny are marginal, that is, if implementing them has no macroeconomic effects. Otherwise, one needs to go back to the basics of public economics to evaluate these actions. The chapter examines the error that one makes by following the classical discounting approach when evaluating non-marginal projects. The evaluation of non-marginal projects must be done by measuring their impact on the social welfare function. A non-marginal investment project with positive future cash flows will have an impact on welfare that is smaller than when estimated by using the standard discounting method.

Keywords:   non-marginal projects, cost-benefit analysis, macroeconomic effects, classical discounting approach, social welfare function, non-marginal investment project, standard discounting method

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