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iscounting turns out to matter more), it is not
because many of the relevant agents are not alive
now. Howshould the unborn be counted? In particu-
lar, should they be counted less than current people
because they happen to come later? A simple
principle of equity would suggest that they should
not—every person should count equally in the
social weighting arrangements.
In my opinion, no satisfactory resolution of these
matters has been found, and the ‘‘correct’’ intertem-
poral policy cannot be determined without making
a value judgement concerning intergenerational
equity. However, it is widely agreed by economists
that some degree of positive discounting is appropri-
ate. Otherwise, policies will be justified that impose
a very heavy tax on current generations even if it
pays out a very small dividend one hundred years
from now, as long as that dividend goes on in
perpetuity. This is but one example where shadow
pricing is imprecise, and unfortunately the impreci-
sion is costly in trying to prescribe correct environ-
mental policy.
DYNAMIC MODELS OF ASSET
MANAGEMENT
The use of prices and shadow prices can be helpful
in making informed policy decisions that involve
small changes, changes that will not have noticeable
effects on the relative values of items they affect. In
such situations,we use the relative values asweights
and aggregate to get a bottom line. In the power
plant example, we would compare the net value of
energy production (by usingmarket prices) with the
cost of pollution and any other nonmarket costs (by
using a shadow price for air quality) and proceed if
and only if the former exceeds the latter.
However, given the imprecisions we have identi-
fied above, we cannot expect shadow pricing to
provide all the input necessary to make correct
public decisions, but rather to provide some disci-
pline to that process. For example, if we find that
under all reasonable ways of determining the value
of clean air its value far exceeds the benefits from a
polluting plant, that plant should be shut down.
But even if we couldmeasure precisely, the above
calculus will not work for large changes. For ex-
ample, suppose we wanted to consider a policy of
curtailing all energy production from nuclear- and
coal-powered plants. What price should we use to
evaluate the lost energy? There is no obvious
answer since the price of energy surely would
change (rise) as a consequence of the policy. Further-
more, the policy would cause other prices (o-