Climate Change & Int Coop: Discounting

Question 1

From what kindof model is the idea of discount rates developed?

Who formed this model and when?

Answer 1

A macroeconomic model that considers a single representative agent

Ramsey, 1928

Question 2

Give the equation for the Ramsey Rule of Discounting

Explain verbally

Answer 2

r = ρ + ng

The monetary discount rate should equal the prure rate of time preference + (the curvature of the utility function x consumption growth)

Question 3

What is the general understanding that should be taken from the Ramsey Rule?

Answer 3

Anything future flows from ab investment that we make today must be discounted

Question 4

What does it mean if ρ = 0?

2 points

Answer 4

This would mean that each generation is treated equally

this is a utilitarian view, which would argue that any form of discounting is morally wrong

Question 5

What number does Stern put on the pure rate of time preference (ρ)?

Explain

Answer 5

Stern uses ρ = 0.001

This is very low and says that we should hardly discount at all against future generations

Question 6

On a graph plotting consumption against utility, what is the “aversion to inequality”?

How is it denoted?

(3 points)

Answer 6

Aversion to inequality is represented by the slope of the curve

(flat = averse to inequality)

Denoted η (high η=flat curve)

Question 7

Give 3 potential issues with discounting

Answer 7

The value of avoided future damages is compared to current stock returns - returns to capital might change in the long run!

Future generations may be poorer than today’s due to climate change

Some damages cannot be expressed in monetary terms