Mitigation between the present and the future Flashcards
Problem 1 - Final Payoff
If your initial capital was 1,000 euros, what is your final capital after 6 years at a 5% interest rate?
Problem 2 - Present Value
If your final capital in 10 years will be 10,000 euros with an 8% interest rate, what is your initial capital?
Problem 3 - Implicit Rate
If your initial capital was 500 euros and your final capital after 5 years is 1,000 euros, what is the interest rate?
Time Preferences
- Is there a correct or wrong answer?
- What does a bid lower than 10,000 euros for the 10,000 euro auction bond indicate?
- What does diversity in bids suggest?
- How is impatience measured?
- There is no correct or wrong answer.
- A bid lower than 10,000 euros indicates a preference for the present over the future.
- Diversity in bids suggests differences in time preferences.
- Impatience is measured by the lower bid.
How do you compute the annual discount rate for one year?
How do you compute the bid for a bond that pays 10,000 euros in one century?
How do economists usually summarize time preferences?
Society: Ramsey
- What is the discount rate of society?
- What does the Ramsey formula consist of?
- What is the pure time discount rate?
- Why might a person be more impatient than society?
- The discount rate of society is determined by the Ramsey formula, which includes survival uncertainty (p), shape of preferences (e), and future material affluence (g)
- The pure time discount rate represents an individual’s choice to prioritize present consumption due to uncertainty about the future
- A person might be more impatient than society due to considerations of extinction risk.
Market Price
- Is the market interest rate a good proxy for the individual or social discount rate?
- What does a positive interest rate reflect?
- What are the different perspectives on using the market interest rate as a proxy?
- The market interest rate is a good proxy for the individual and social discount rate, according to some perspectives (Nordhaus).
- However, other perspectives (Stern) argue that it assumes a perfectly functioning market economy and neglects externalities.
Declining Discounting
- What is the “tyranny of discounting”?
- How can declining discounting affect the present value of future benefits?
- What is the biggest uncertainty in the economics of climate change?
- The “tyranny of discounting” refers to the diminished present value of costs and benefits in the distant future due to high discount rates.
- Declining discounting can significantly reduce the present value of future benefits.
- The biggest uncertainty in the economics of climate change is the choice of discount rate.
Who proposed the idea of a declining social discount rate?
Options:
a) Martin Weitzman
b) Robert Solow
c) Paul Krugman
d) Joseph Stiglitz
a) Martin Weitzman
What is Weitzman’s proposal regarding the social discount rate?
Options:
a) To increase the social discount rate over time
b) To keep the social discount rate constant over time
c) To decrease the social discount rate over time
d) To eliminate the use of a social discount rate
c) To decrease the social discount rate over time
What is the rationale behind Weitzman’s proposal?
Options:
a) To prioritize short-term benefits over long-term benefits
b) To incentivize immediate action on climate change
c) To account for the diminishing marginal utility of consumption
d) To minimize the economic cost of climate mitigation measures
c) To account for the diminishing marginal utility of consumption
How does Weitzman’s proposal differ from the conventional approach to the social discount rate?
Options:
a) It ignores the intergenerational equity aspect
b) It emphasizes the importance of economic growth
c) It considers the long-term consequences of climate change
d) It assigns a higher weight to future generations’ welfare
d) It assigns a higher weight to future generations’ welfare
What are the potential implications of Weitzman’s proposal?
Options:
a) It may lead to delayed or insufficient climate action
b) It may encourage more aggressive climate mitigation measures
c) It may prioritize long-term benefits over short-term benefits
d) It may result in higher economic costs for climate mitigation
c) It may prioritize long-term benefits over short-term benefits
Do experts agree on the rate of social time preference, stpr? (the discount rate)
No, and it leads to huge differences in what they propose we should do
How do you calculate declining discounting :)
What are four technical notes to avoid misunderstanding when calculating discount rates? :)
