TheDiscountRateandResourceAllocationOverTime.pdf NREM 203
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This 1 page Class Notes was uploaded by Cassandra Miller on Saturday February 13, 2016. The Class Notes belongs to NREM 203 at Ball State University taught by Megan Sharp in Spring 2016. Since its upload, it has received 15 views. For similar materials see Decision Making in Natural Resource Management in Environmental Science at Ball State University.
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Date Created: 02/13/16
The Discount Rate and Resource Allocation Over Time Wednesday, February 10, 2016 9:03 AM Imagine you own a copper mine with 250 units of copper. Do you Harvest and sell all copper deposits immediately? Hold some copper for the future period based on an estimate of probable future prices? Hypothetical equilibrium is $100 for quantity of 200 units of copper Marginal net benefit - the difference between the value to the consumer and the cost of supply for each unit of copper Generally largest for the first unit extracted and declines to zero at equilibrium It only makes sense to produce 200 units of copper Determining marginal net benefit of copper in the second period: Cannot know the value for sure What we do know o Fixed quantity of copper must be divided between two periods What we're assuming o Marginal net benefits of copper in period 2 will be exactly the same as in the present o Period 2 is ten years in the future o A discount rate of 7.25% Value of copper sold in the future r = discount rate n = number of years PV[MNB2] = MNB 2 / (1+r)^n = MNB2/(1+0.075)^10 = MNB2/2.013 Because the present value of the copper sold in the future is currently worth half of what it will you need to cut the price in half Present should consume 150 units and save 100 for the future Green demonstrates the future benefit Red demonstrates the current benefit If they first consume 200 units the yellow triangle of benefit will be lost Higher discount rates encourage higher consumption rates the first time The more copper we consume in the present, the higher the costs are in the future Hartwick's Rule Do we have an obligation to conserve resources for future generations? Hartwick's rule - the proceeds from resources sales should be invested, not consumed Rather than leaving resources for future generations, we replace them with an equal value of produced capital Choosing a discount rate Use a prevailing interest rate o Interest rate on a savings account o Interest rate on a government bond over the same time period
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