IF lecture 3

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is the Social Discount Rate (SDR) proposed by Stern?

4.5%

10%

2.5%

1.4% (correct)

Which perspective did Nordhaus take regarding the SDR?

Positive (correct)

Speculative

Prescriptive

Normative

What is the main implication of Stern's SDR on climate change actions?

It supports minimal action.

It advocates for strong and immediate action. (correct)

It promotes delaying action until future benefits are clearer.

It favors long-term investments only.

How much would one have to sacrifice today for a benefit of 1000 CHF in 100 years according to Stern’s SDR?

250 CHF Signup and view all the answers

What does Nordhaus suggest about immediate action on climate change?

The need for extreme immediate action is questionable. Signup and view all the answers

What was a significant outcome of the debate over SDR among experts?

Formation of a middle ground among views. Signup and view all the answers

What can explain the larger disagreement among policymakers compared to academics regarding the SDR?

The link between academics and policymakers. Signup and view all the answers

What does Nordhaus's SDR imply for today's sacrifice for a future benefit of 1000 CHF?

10 CHF Signup and view all the answers

What does the Social Time Preference (STP) approach focus on?

The trade-off between current and future consumption Signup and view all the answers

Which of the following accurately describes the numeraire used in the Social Time Preference approach?

Consumption Signup and view all the answers

What does the production-side approach measure?

The social cost of public investment against public funding Signup and view all the answers

When do the consumption-side and production-side approaches coincide?

In a perfectly competitive equilibrium Signup and view all the answers

What is the focus of the Social Discount Rate (SDR) in relation to societal preferences?

Measuring intergenerational equity Signup and view all the answers

What does the Simple Ramsey Rule express regarding the Social Discount Rate (SDR)?

SDR is the sum of the pure time discount factor and the product of ethical considerations. Signup and view all the answers

Which of the following represents a challenge in determining the SDR according to the content?

Lack of consensus on how to calibrate the parameters is a problem. Signup and view all the answers

What ethical consideration related to the calibration of δ is mentioned?

Individual patience or altruism can have a positive value. Signup and view all the answers

What is indicated about societal weights on future utilities in the discussion of δ?

They are set to zero in normative considerations. Signup and view all the answers

In the equation for SDR, which variable represents the per capita growth rate?

g Signup and view all the answers

The pure time discount factor δ is associated with which of the following concepts?

The consideration of immediate satisfaction over future benefits. Signup and view all the answers

What does η represent in the context of the SDR?

The ethical weighting of future generations' utilities. Signup and view all the answers

Which of the following statements accurately reflects the debate surrounding δ?

Meta-ethical discussions include risks of extinction as a consideration. Signup and view all the answers

What is the assumed form of the utility function when η is not equal to 1?

U(Ct) = (Ct^(1−η))/(1−η) Signup and view all the answers

Which assumption is made about the period-consumption growth rate in the social welfare calibration?

It is constant and equal to g. Signup and view all the answers

What does the variable δ represent in the context of social welfare specification?

The rate at which future benefits are discounted. Signup and view all the answers

How is the current social value of the project denoted in the social welfare calibration?

As p, the social planner's willingness-to-pay. Signup and view all the answers

What is the elasticity parameter η in the context of the isoelastic utility function?

It indicates the responsiveness of consumption to changes in utility. Signup and view all the answers

When η equals 1, what form does the utility function take?

U(Ct) = ln(Ct) Signup and view all the answers

Which aspect does the social welfare function account for over time?

The cumulative impact of future consumption through discounting. Signup and view all the answers

What is the primary consideration of intergenerational fairness in the social welfare context?

Ensuring that future generations inherit equitable resources. Signup and view all the answers

What is the primary purpose of the Social Discount Rate (SDR)?

To convert future costs and benefits into current values Signup and view all the answers

How does the present value relate to the Social Discount Rate (SDR)?

It is extremely sensitive to alterations in the SDR Signup and view all the answers

In the context of project assessment, what does the term 'present values' refer to?

Current representation of future costs and benefits Signup and view all the answers

Why is intergenerational fairness an important consideration in discounting?

It ensures that future generations are not overly burdened by present-day decisions Signup and view all the answers

What outcome might result from improperly applying the Social Discount Rate?

Future benefits may appear less significant than they actually are Signup and view all the answers

Which aspect of project analysis is MOST affected by changes in the Social Discount Rate?

Present value of future cash flows Signup and view all the answers

What is a potential risk of having a high Social Discount Rate?

Underappreciation of long-term benefits Signup and view all the answers

How might an inappropriate discount rate influence decision-making in project funding?

It could lead to inadequate funding for important long-term projects Signup and view all the answers

What is Nordhaus' perspective on the urgency of action against climate change?

Only minimal sacrifices are required today. Signup and view all the answers

According to Stern's rate, what is the sacrifice required today for a benefit of 1000 CHF in 100 years?

250 CHF Signup and view all the answers

What do some argue should be included in the derivation of the Social Discount Rate?

Simple Ramsey Rule with risk factors. Signup and view all the answers

What is a key point of disagreement regarding the Social Discount Rate (SDR)?

The criteria for its calculation. Signup and view all the answers

What are market price approaches in the context of SDR?

Calculations that rely on current market valuations. Signup and view all the answers

What kind of extensions are suggested for the Simple Ramsey Rule?

Factors like risk, inequality, and substitutability. Signup and view all the answers

Which of the following is NOT an argument regarding the Social Discount Rate?

It should prioritize short-term economic gains. Signup and view all the answers

What is a potential consequence of a higher Social Discount Rate?

Reduction in immediate actions against climate change. Signup and view all the answers

Study Notes

Intergenerational Fairness

Lecture notes on intergenerational fairness, Fall 2024, Lecture 3, October 11, 2024, by Paolo G. Piacquadio.
Presentation covered the Stern Review, chapter 2, discounting.

Comments

SDR (Social Discount Rate)
Decreasing marginal ability
Inequality
Risk/Insurance
Pun time discounting

Comments (cont.)

Risk constancy over time
How to use SDR
Small vs. large projects

Time and Discounting

Projects with costs and benefits over multiple periods.
Social Discount Rate (SDR) converts future costs/benefits to present values.

Time and Discounting (cont.)

Present values are sensitive to changes in SDR.

Stern (2007) advocated for a 1.4% SDR.
Nordhaus (2008) proposed a 4.5% SDR.
Academic debate continues, with some consensus forming on a middle ground.
Policymakers' disagreement is also substantial.

Stern's rate favors immediate climate action (sacrifice 250 today for a 1000 CHF benefit in 100 years).
Nordhaus' rate is more lenient (sacrifice only 10 today for the same 1000 CHF benefit in 100 years).

Some argue SDR should be derived from the Simple Ramsey Rule, considering uncertainty, risk, inequality, and limited substitutability of non-market goods.
Others advocate for market price approaches or alternative societal criteria.

Graph showing SDRs by different countries and approaches.

Consumption-side approach
STP reflects society's willingness to trade-off current consumption for future benefits.
Numeraire: Consumption.
Other approaches such as the production-side approach (SOC).
Numeraire: Investment.

Social welfare is specified as a sum of future utilities discounted by the SDR.
Project value is interpreted by the social planner's willingness-to-pay.

Assume a constant period-consumption growth rate (g).
Utility function as isoelastic, with elasticity (η).

The project's value is the sum of future benefits, discounted by (δ+ng).
The Simple Ramsey Rule emerges, with SDR = δ + η · g.
No consensus on calibrating parameters.

The Pure Time Discount Factor δ

Meta-ethical discussions on calibrating δ.
Positive considerations like individual patience and altruism ( greater than 0 percent).
Normative considerations on societal weights of future utilities (0 percent).
Agent-relative ethics on extinction risk (greater than 0 percent).

The Wealth Effect η · g

Wealth effect considers utility function concavity and changing future wealth (higher g).
Increased consumption inequality aversion (higher η) reduces value placed on future projects.

Extended Ramsey Rule incorporates risk in the SDR calculation (including the variance of the growth rate), SDR=δ+ng−.5η(η+1)σ2.
Risk effect is typically smaller than the wealth effect.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

Explore the key concepts of intergenerational fairness in this lecture. Discussing the Social Discount Rate (SDR) and its implications on project evaluation over multiple periods, this quiz covers critical insights from the Stern Review and contemporary academic debates. Ideal for students looking to understand the complexities of discounting future benefits and costs.