436 Problem Set 8 Answers SU18.pdf

# 2 away free therefore a hybrid instrument including

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2 away free. Therefore, a hybrid instrument including both long-term and short-term tradable permits might be a better choice. The long-term permits would be given away free to avoid the high costs on polluters that a tax would impose, and the one-year permits would be sold at an agreed price and would avoid the excessively high permit prices that might occur if only long-term permits were used. IV. Society’s rate of time preference can be expressed as RTP = α + βγ . A. Define the terms α, β, and γ. α is the pure rate of time preference and indicates how impatient consumers are, β is the absolute value of their elasticity of marginal utility with respect to consumption, and γ is the percentage rate of growth of consumption . B. In policy debates concerning global climate change, it is often accepted that β is about 1.0 and γ is about 2.5. However, there is substantial disa greement about the value of α with some analysts saying it should be zero and others that it should be 1.0. What is the present value of \$1 billion of damages that occurs 100 years from now under each of these assumptions about α? If α = 0 , RTP = 2.5 and the present value is (\$1 billion)/(1.025) 100 = \$84.6 million. If α = 1, RTP = 3.5 and the present value is (\$1 billion)/(1.035) 100 = \$32.1 million. So assuming that the pure rate of time preference equals zero rather than 1.0 makes the present value 2.6 times larger.

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