Chapter 15Equity
The basic inequality in our society is surely between peo-
ple with different levels of happiness, not different levels of
income. So should not policy analysis give more weight to
changes in happiness among those who are the least happy?
Jeremy Bentham thought not, but modern opinion inclines
more in that direction. So how much extra weight?^12 The
best approach is probably to ask the population what they
think about the weights. When comparing options, one can
also use sensitivity analysis to see what difference (if any)
the weights make.^13
The Discount Rate
Another, related, issue is how to add up effects occurring at
different points in time. For most individuals the effects of a
policy change are spread over a number of years, and indeed
some policies affect people not yet born. So what discount
rate should we use to combine effects that occur in different
years? In traditional cost- benefit analysis the discount rate
consists of two elements that are added together. The first
element (the “social pure time discount rate”) reflects the
general uncertainty about the future; the second reflects the
fact that future generations are expected to be richer and
therefore to have a lower marginal utility of income. In the
current UK Treasury Green Book the first element is put at
1.5 percent per annum and the second at 2 percent.^14 There
is clearly a case for a pure time discount rate. But, when
our measurements are in units of happiness, declining mar-
ginal utility of income ceases to be relevant, although there