7_Intertemporal Efficiency Flashcards
Trade-off:
Think about the number of chocolate bars you are willing to consume
- You get more and more saturated (MB decreases)
- The more you spent, the less money is left for other things
How do we weigh the benefits against the cost if they occur at different times?
- Private consumption decisions
- Societal/political decisions, e.g. How much to invest in global warming prevention
Intertemporal trade-offs:
Think about the number of chocolate bars you are willing to consume today and how many you want to keep for tomorrow
We usually prefer things sooner rather than later, i.e. we demand a compensation for postponing consumption
- Humans are generally impatient and prefer instant gratification to waiting for long-term benefits
- Uncertainty. Will I live in the future? Will I have the same preferences?
- If we can expect to get richer over time, consumption today is more valuable (decreasing marginal utility)
- Inflation: value of money decreases
- We could invest the money and earn a profit (interest, return)
- The role of “discounting” in decision making -> to give a smaller weight to the future than to the present: reasons
- Impatience (positive time preference
- Opportunity costs
- Inflation
- Wealth differences
- Risk
Utility function
A person’s utility is presented by a utility function: U = U(C1, … , Cn)
- We assume utility functions to be…
- monotone increasing (non-satiation)
- concave
- differentiable
Efficiency
- Def: optimal allocation of resources -> marginal value of different uses is the same
- The same is true for the allocation across time periods -> the marginal value of consumption now must be equal to the marginal value of consumption in the future
Pareto efficiency:
an allocation of resources/goods such that no one can be made better-off without making someone worse-off
Pareto improvement
moving from one allocation to another where at least someone is made better-off without making anyone worse-off
Potential pareto improvement:
Moving from one allocation to another where the winners can compense the losers
