lecture16 - Applied Welfare Economics Part IIB: Paper 1 Dr...

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Applied Welfare Economics Part IIB: Paper 1 Dr Toke Aidt Lecture 16 Social Cost Benefit Analysis Discounting for the very long run Road pricing
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Outline Discounting for the very long run and the role of uncertainty. Application of SCBA to road pricing.
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Discounting for the very long-run Some public policy measures take a long time (more than 50 years) to deliver benefits: Investments in mitigation of global warming (Stern Report); radioactive waste, loss of biodiversity etc. Some investments in infrastructure (think about College buildings. ..) The costs are typically up front, but the benefits are in the future AND are often highly uncertain.
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The power of discounting years 100 200 300 400 Consumption, c t 100 Known date of catastrophic event 10 Δc=-90 A policy that can avoid the event exists. How much current consumption will society be willing to give up in support of that policy?
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( 29 ( 29 = + + = 0 1 1 1 1 300 τ δ c SWF Consumption discount rate ΔSWF Event at t=300 ΔSWF Event at t=400 3.5% 0.08 0.003 2% 11.8 1.6 1% 454 168 ( 29 1 0 1 1 = = + Willing to give up very little consumption today to avoid the event. Relative importance of the event: It matters a lot if the event will happen in 300 or 400 years time, but should it?
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Huge uncertainties about benefits and costs over long time horizons: an example Current consumption is 100. Imagine three scenarios: G = technological progress => we forecast that consumption in year 100 is 600. B = no (or little) technological progress => we forecast that consumption in year 100 is 100. RB = a sequence of catastrophic events over the next 100 years => consumption in year 100 is just 10. Follow Ramsay, so no pure time preference (
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This note was uploaded on 06/04/2011 for the course ECONOMICS paper 1 taught by Professor Aidt during the Spring '11 term at Cambridge.

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lecture16 - Applied Welfare Economics Part IIB: Paper 1 Dr...

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