Social time preference

3 key takeaways

• Social time preference indicates how society values present benefits compared to future benefits, influencing decisions on long-term projects and policies.
• It is used to determine the social discount rate, which helps evaluate the present value of future costs and benefits in cost-benefit analyses.
• The social time preference rate (STPR) accounts for factors like pure time preference, expected economic growth, and the uncertainty of future benefits.

What is social time preference?

Social time preference is an economic concept that describes the collective attitude of society towards valuing immediate benefits more highly than future benefits. It is used to determine the social discount rate, which is applied in cost-benefit analyses of public policies, infrastructure projects, and environmental regulations. The social discount rate helps policymakers assess whether long-term projects provide sufficient future benefits to justify the present costs.

Components of social time preference

The social time preference rate (STPR) is typically composed of several factors:

• Pure time preference: This reflects the inherent preference for immediate benefits over future benefits, even in the absence of uncertainty and economic growth.
• Expected economic growth: Higher expected economic growth increases future consumption, which can reduce the relative value of future benefits compared to present benefits.
• Uncertainty: The uncertainty about future benefits, such as economic conditions or technological advancements, affects the preference for present consumption.
• Intergenerational equity: Considerations of fairness and equity between current and future generations influence the social time preference rate.

Calculation of the social discount rate

The social discount rate is derived from the social time preference rate and is used in evaluating public investments and policies. It can be calculated using the Ramsey formula:

SDR = p + (e * g)

where:

• p (rho) is the pure time preference rate.
• e (eta) is the elasticity of marginal utility of consumption, reflecting the diminishing marginal utility of consumption.
• g is the expected growth rate of per capita consumption.

Applications of social time preference

Social time preference is applied in various contexts:

• Public policy evaluation: It is used to discount future costs and benefits of long-term policies, such as infrastructure development, healthcare, and education investments.
• Environmental economics: Social time preference is crucial in assessing the present value of future environmental benefits and costs, influencing policies on climate change, conservation, and sustainable development.
• Intergenerational projects: Projects that impact future generations, like pension schemes and social security reforms, use social time preference to evaluate their long-term benefits and costs.

Importance of social time preference

Understanding social time preference is essential for several reasons:

• Informed decision-making: It helps policymakers make informed choices about investments and policies that have long-term impacts.
• Balancing interests: It ensures that the interests of both present and future generations are considered, promoting sustainable development and intergenerational equity.
• Efficient resource allocation: By valuing future benefits appropriately, social time preference aids in the efficient allocation of resources towards projects that offer the greatest overall benefit to society.

Challenges in determining social time preference

Determining the appropriate social time preference rate involves several challenges:

• Ethical considerations: Balancing the needs and rights of current and future generations raises complex ethical questions.
• Uncertainty: Predicting future economic conditions, technological advancements, and societal preferences involves significant uncertainty.
• Divergent views: Different stakeholders may have varying opinions on the appropriate rate of time preference, reflecting diverse values and priorities.

Social time preference is a fundamental concept in economics and public policy, influencing how society values present versus future benefits. By determining the social discount rate, it helps policymakers evaluate the long-term impacts of their decisions, ensuring that resources are allocated efficiently and equitably across generations.