The Seawall Dilemma: Evaluating Long-Term Investment Advice
A coastal city is considering a major infrastructure project: building a comprehensive seawall system to protect against significant sea-level rise projected to occur in 80 years. The project has a large upfront cost. You are presented with two conflicting recommendations from economic advisors:
- Advisor A: "We must act decisively now. The future welfare of our citizens is just as important as our own. By using a low discount rate (e.g., 1.4%), we correctly value the immense future benefits of protection, justifying the significant immediate investment."
- Advisor B: "While the future is important, we must be realistic. A high upfront cost will divert funds from current pressing needs like education and healthcare. Furthermore, future generations will likely be wealthier and have better technology to tackle this problem. Using a higher discount rate (e.g., 4.3%) reflects these realities and suggests a more gradual, less costly approach is optimal."
Critically evaluate the arguments of both Advisor A and Advisor B. In your evaluation, explain how each advisor's choice of discount rate reflects a different stance on intergenerational equity and assumptions about future economic growth.
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