Three Topics discounting toman trade 120110

Three Topics discounting toman trade 120110 - Three...

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hree Topics Three Topics 1. Social Discounting 2. Toman’s Two Tier Decision Framework 3. Trade and the Environment
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The Social Discount Rate and Discounting Over Long Periods Using A Constant Rate Weitzman, Journal of Environmental Economics and Management , 1994 “Using a constant market interest rate is particularly problematic when the rate exceeds the growth rate of the economy, as has recently been the case in many industrialized countries. The use of a constant market rate implies that it never pays for a society to spend even a tiny amount today in order to avert an environmental disaster that will destroy the economy’s entire annual output, as long as that disaster occurs sufficiently far into the future. For example, if the U.S. economy produces $9 trillion in output this year and is growing at a real rate of 2 percent a year, and we use a real discount rate of 8 percent, then the PV of the economy’s entire annual output in 300 years is only $321,490. any economists and other persons are uncomfortable with the implication that it is not Many economists and other persons are uncomfortable with the implication that it is not worth spending more the $321,490 today to avert a total disaster in 300 years.” Boardman et al., Cost Benefit Analysis , 2001
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But What Rate to Use (if any)? Market –Based Approaches rm a r g i n a l rate of return on private investment: This is what society is able to trade off in production between two periods. bserved market rate quality of supply and demand i observed market rate , equality of supply and demand. s( m a r k e t determined) social rate of time preference: This is what society (individuals) are willing to trade off in consumption between two periods. The opportunity cost of capital based on risk free lending.
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This note was uploaded on 12/20/2010 for the course AEM 25 at Cornell.

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Three Topics discounting toman trade 120110 - Three...

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