(a) What is the Ramsey formula for the discount rate r defined in lecture? (b) True or false: - There is a moral argument that we should set =0. - The discount rate r measures how much we care about utility tomorrow relative to utility today. - If inflation makes $10 today worth $9 tomorrow, then this would imply that the real discount rate between today and tomorrow is given by 10/(1+r)=9, or r=1/9. - The "prescriptive" approach to discounting prescribes ,, and g to then determine r. - The "descriptive" approach to discounting takes data on r,, and g to then calibrate . (c) Nordhaus and Stern each reach very different conclusions about the marginal social cost of carbon. Which estimates do you find more compelling, if any? (d) Suppose that it is currently 2022, and that damage from climate change is predicted to be 0 for every year until 2030, at which point climate change is predicted to destroy $100 billion of consumption each year until 2100. If we use an annual discount rate of r=0.05, how much would we be willing to pay to entirely prevent climate change from happening? (e) Recalculate your answer to (d) with r=0.02, and contrast. (f) Suppose that we can fund some scientists today to conduct research to invent a costless method to take all of the carbon out of the atmosphere. If funded, the research will succeed with probability p=0.1. We will learn of its success or failure in 2025 . How much should we be willing to pay today to fund the research project, if climate damages and the discount rate are the same as in (d)? (g) Suppose that we are in the world of (f), but in addition that if the project fails, we can then instead undertake evasive action that prevents global warming for a one-time payment of $1 trillion. How much should we be willing to pay today to fund the research project? (a) What is the Ramsey formula for the discount rate r defined in lecture? (b) True or false: - There is a moral argument that we should set =0. - The discount rate r measures how much we care about utility tomorrow relative to utility today. - If inflation makes $10 today worth $9 tomorrow, then this would imply that the real discount rate between today and tomorrow is given by 10/(1+r)=9, or r=1/9. - The "prescriptive" approach to discounting prescribes ,, and g to then determine r. - The "descriptive" approach to discounting takes data on r,, and g to then calibrate . (c) Nordhaus and Stern each reach very different conclusions about the marginal social cost of carbon. Which estimates do you find more compelling, if any? (d) Suppose that it is currently 2022, and that damage from climate change is predicted to be 0 for every year until 2030, at which point climate change is predicted to destroy $100 billion of consumption each year until 2100. If we use an annual discount rate of r=0.05, how much would we be willing to pay to entirely prevent climate change from happening? (e) Recalculate your answer to (d) with r=0.02, and contrast. (f) Suppose that we can fund some scientists today to conduct research to invent a costless method to take all of the carbon out of the atmosphere. If funded, the research will succeed with probability p=0.1. We will learn of its success or failure in 2025 . How much should we be willing to pay today to fund the research project, if climate damages and the discount rate are the same as in (d)? (g) Suppose that we are in the world of (f), but in addition that if the project fails, we can then instead undertake evasive action that prevents global warming for a one-time payment of $1 trillion. How much should we be willing to pay today to fund the research project
