An Introduction to Spatial Discounting

Research on the valuation of environmental externalities shows that decision makers tend to discount not only over time but across space. Just as time discounting has implications for intergenerational equity,geographical or spatial discounting has implications for intragenerational equity. Similarly, just as positive time discount rates are warranted by positive net rates of growth of the capital stock, positive spatial discount rates may be warranted by the fact that environmental (or other external) effects of economic activity are diffused at positive rates. This paper introduces the notion of spatial discounting and explores its welfare implications through a simple diffusion model. 1. DISCOUNTING SPACE AND THE VALUATION OF ENVIRONMENTAL EXTERNALITIES Two separate literatures in environmental economics offer prima fácie evidence that decision makers treat future and distant externalities in a symmetrical way. One concerns the empirical relation between per capita income and various indicators of environmental quality: the ‘Environmental Kuznets Curve’ (EKC). The other concerns the valuation of spatially differentiated nonmarketed environmental goods and services. Both literatures show that decision makers give less weight to geographically distant effects than to neighborhood effects. Just as people have preferences over time, they have preferences over space also. Moreover, just as preferences over time can be summarized in a rate of time preference and implemented through application of a time discount rate, so preferences over space can be summarized in a rate of geographical preference and implemented through application of a spatial discount rate The evidence from the EKC literature is indirect. Empirical work on the relation between per capita income and expenditure on environmental public goods has shown that local environmental quality has some of the characteristics of a luxury good. There exists an empirical relationship between per capita © Blackwell Publishers 2001. Blackwell Publishers, 350 Main Street, Malden, MA 02148, USA and 108 Cowley Road, Oxford, OX4 1JF, UK. Received December 1989; revised May 2000; accepted July 2000. JOURNAL OF REGIONAL SCIENCE, VOL. 41, NO. 1, 2001, pp. 23–38