IF lecture 3
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Questions and Answers

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

  • To assess intergenerational fairness
  • To convert future benefits into present values (correct)
  • To determine the total costs of a project
  • To calculate future costs

    • The present value is resistant to changes in the Social Discount Rate (SDR).

    False

    What does SDR stand for?

    Social Discount Rate

    The Social Discount Rate converts future costs and benefits into current units of account, known as _________.

    <p>present values</p> Signup and view all the answers

    What factor does the present value's sensitivity depend upon?

    <p>Social Discount Rate (SDR)</p> Signup and view all the answers

    The calculation involving SDR remains unchanged when assessing long-term projects.

    <p>False</p> Signup and view all the answers

    Why is intergenerational fairness a relevant concept in discounting?

    <p>It assesses how current decisions affect future generations.</p> Signup and view all the answers

    Match the terms with their definitions:

    <p>Social Discount Rate (SDR) = Converts future costs and benefits into present values Present Value = Current equivalent of future money Intergenerational Fairness = Assessment of equity across generations Discounting = Process of determining current value of future amounts</p> Signup and view all the answers

    What Social Discount Rate (SDR) did Stern advocate for?

    <p>1.4%</p> Signup and view all the answers

    What was Nordhaus's proposed SDR?

    <p>4.5%</p> Signup and view all the answers

    There is currently a complete consensus among experts regarding the appropriate SDR.

    <p>False</p> Signup and view all the answers

    What amount would Stern's rate require sacrificing today for a future benefit of 1000 CHF?

    <p>250 CHF</p> Signup and view all the answers

    Nordhaus's SDR suggests sacrificing only ___ today for a guaranteed benefit of 1000 CHF in 100 years.

    <p>10 CHF</p> Signup and view all the answers

    What is the Social Discount Rate (SDR) primarily used for?

    <p>To convert future costs and benefits into present values</p> Signup and view all the answers

    Stern advocated for a Social Discount Rate (SDR) of 4.5%.

    <p>False</p> Signup and view all the answers

    Match the economists with their proposed SDR.

    <p>Stern = 1.4% Nordhaus = 4.5%</p> Signup and view all the answers

    What is the main consequence of minor alterations to the Social Discount Rate (SDR)?

    <p>It significantly affects the present value calculations.</p> Signup and view all the answers

    What do Stern's and Nordhaus's differing SDRs represent in terms of climate change action?

    <p>A difference in urgency on climate change mitigation</p> Signup and view all the answers

    What has been the general trend in disagreement about SDR among academics, as noted in recent studies?

    <p>Less polarized, with a majority forming a middle ground</p> Signup and view all the answers

    After the Stern Review, the majority of experts formed a __________ on the appropriate SDR.

    <p>middle ground</p> Signup and view all the answers

    Match the following economists with their respective proposed SDRs:

    <p>Stern = 1.4% Nordhaus = 4.5% Drupp et al. = Serious disagreement Groom &amp; Hepburn = Link between academics and policymakers</p> Signup and view all the answers

    Which factor does NOT contribute to policymakers' disagreement on SDR?

    <p>Public opinion on environmental policies</p> Signup and view all the answers

    The debate on the Social Discount Rate (SDR) has completely polarized institutions leading to a singular agreement.

    <p>False</p> Signup and view all the answers

    What year did Nordhaus propose his Social Discount Rate?

    <p>2008</p> Signup and view all the answers

    What does the Social Time Preference (STP) approach reflect?

    <p>The rate at which society trades-off current consumption for future consumption</p> Signup and view all the answers

    The production-side approach measures social welfare based on consumption patterns.

    <p>False</p> Signup and view all the answers

    What does the numeraire refer to in the consumption-side approach?

    <p>Consumption</p> Signup and view all the answers

    In a perfectly competitive equilibrium, the consumption-side and _____ side approaches coincide.

    <p>production</p> Signup and view all the answers

    What is the formula for social welfare in the STP approach?

    <p>!W (C0 , C1 ,...) = ∞ exp {−δt} U (Ct)</p> Signup and view all the answers

    The social planner’s willingness-to-pay, p, is calculated based on future benefits of a project, Bt.

    <p>True</p> Signup and view all the answers

    What does 'U (Ct)' represent in the context of social welfare calculation?

    <p>Utility of consumption</p> Signup and view all the answers

    Match the following concepts with their respective definitions:

    <p>Social Time Preference (STP) = Reflects trade-off of consumption over time Production-side approach = Measures social cost against public investment Utility function (U) = Represents satisfaction from consumption Social planner's willingness-to-pay = Current social value of future benefits</p> Signup and view all the answers

    What does the utility function U represent when η ≠ 1?

    <p>$ rac{C_t^{1-η}}{1-η}$</p> Signup and view all the answers

    The social planner's willingness-to-pay is interpreted as the current social value of a project.

    <p>True</p> Signup and view all the answers

    What is assumed about the period-consumption growth rate in this analysis?

    <p>It is constant and equal to g.</p> Signup and view all the answers

    The isoelastic utility function is used when elasticity η is ________ or greater.

    <p>0</p> Signup and view all the answers

    In the equation for social welfare, what is represented by the variable t?

    <p>The time period</p> Signup and view all the answers

    The utility function is always assumed to be the same regardless of the elasticity coefficient.

    <p>False</p> Signup and view all the answers

    What does Bt represent in the context of potential projects?

    <p>Future benefits at time t.</p> Signup and view all the answers

    Match the type of elasticity with its corresponding utility function formula.

    <p>η ≠ 1 = $ rac{C_t^{1-η}}{1-η}$ η = 1 = ln $C_t$</p> Signup and view all the answers

    What is the formula for the Social Discount Rate (SDR) as derived from the Simple Ramsey Rule?

    <p>SDR = δ + η · g</p> Signup and view all the answers

    There is a universal consensus on how to calibrate the parameters δ and η.

    <p>False</p> Signup and view all the answers

    What challenges arise from calibrating the pure time discount factor δ?

    <p>Meta-ethical discussions include individual patience or altruism, societal weights on future utilities, and extinction risk.</p> Signup and view all the answers

    The Simple Ramsey Rule was introduced by ______ in 1928.

    <p>Ramsey</p> Signup and view all the answers

    Which of the following is a positive consideration when calibrating δ?

    <p>Individual patience or altruism</p> Signup and view all the answers

    The variable η in the SDR formula reflects inflation rates.

    <p>False</p> Signup and view all the answers

    What issue is often discussed regarding intergenerational fairness in the context of discounting?

    <p>The balance between current and future utility generations.</p> Signup and view all the answers

    Study Notes

    Intergenerational Fairness

    • The lecture discusses discounting within the context of the Stern Review, specifically chapter 2, focusing on intergenerational fairness.
    • The lecture notes cover the Social Discount Rate (SDR) and the ongoing debate surrounding it.
    • The SDR converts future costs and benefits to present values.

    Social Discount Rate (SDR): Disagreement

    • There's disagreement on the SDR following the Stern Review.
    • Stern (2007) advocated a 1.4% SDR, taking a normative stance.
    • Nordhaus (2008) proposed a 4.5% SDR from a "positive" perspective.
    • There's ongoing academic debate on the appropriate SDR, with experts seemingly converging towards a "middle ground," although disagreement persists (Drupp et al., 2018).
    • Policymakers' views diverge even more, although these differences are partially explained by the connection between academic and policy spheres (Groom & Hepburn, 2017).

    Illustrative Examples

    • An example calculation illustrates how differing SDRs affect the perceived cost of climate action.
    • Stern's rate suggests a significant current investment to mitigate future climate change.
    • Nordhaus' rate presents a more lenient perspective on the need for immediate action.

    The Social Discount Rate (SDR): In Practice

    • Different countries and institutions have varied SDRs.
    • A chart displays sample social discount rates across various nations.

    The Social Time Preference (STP) approach

    • The STP reflects society's trade-off between current consumption and future consumption.
    • Consumption is the numeraire for STP.

    The social welfare calibration of the STP

    • Social welfare is often measured using the expression W(C0, C1,...) = ∑t=0 exp{-St} U(Ct)
    • A project's current social value is interpreted as the social planner's willingness-to-pay.

    Simplifications

    • The utility function (U) is assumed to be isoelastic to simplify analysis.
    • The period-consumption growth rate (g) is considered constant for simplicity.

    The Simple Ramsey Rule

    • The Simple Ramsey Rule, as proposed by Ramsey (1928), links the SDR to various parameters.
    • Given the assumed simplified conditions, the expression SDR = δ + η · g emerges.

    The pure time discount factor δ

    • Meta-ethical discussions about calibrating δ are relevant.
    • Possible considerations include: individual patience, altruism, normative societal weights on future utilities, and/or considerations on extinction risk.

    The wealth effect (η · g)

    • The wealth effect, related to the variable η · g, reflects how changes in future wealth influence the social valuation of future projects.
    • The wealth effect often plays a larger role than the pure time discount bias in practice.

    social welfare calibration of the STP: risk?

    • The Extended Ramsey Rule incorporates the additional variable σ2 (variance of the growth rate), and further refines the calculation of the SDR.
    • This risk factor often has a smaller impact than the wealth effect in practical applications.

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    Related Documents

    Lecture 3: Intergenerational Fairness (Fall 2024) PDF

    Description

    Explore the fundamental concepts of the Social Discount Rate (SDR) in this quiz. You'll learn about its purpose, how it converts future costs and benefits, and the opinions of key economists like Stern and Nordhaus. Test your understanding of this essential economic tool and its implications for intergenerational fairness.

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