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by: Bridie Batz

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ENVIRONMENTAL ECONOMICS ECON 4545

Bridie Batz

GPA 3.53

Edward Morey

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COURSE
PROF.
Edward Morey
TYPE
Class Notes
PAGES
6
WORDS
KARMA
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This 6 page Class Notes was uploaded by Bridie Batz on Friday October 30, 2015. The Class Notes belongs to ECON 4545 at University of Colorado at Boulder taught by Edward Morey in Fall. Since its upload, it has received 27 views. For similar materials see /class/232128/econ-4545-university-of-colorado-at-boulder in Economcs at University of Colorado at Boulder.

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Date Created: 10/30/15
Econ 4545 Environmental Economics Review Questions Set 4 Global Warming Discounting Present Value Social Rate of Discount etc 1 What is the present value of 50000yr for 20 years if the discount rate is 10 As part of your answer de ne present value and discount rate Why is the present value of this stream less than 1000000 Show all of your calculations and explain them in words Answer I am going to answer this and the next question assuming discrete discounting what was presented in class Simply put present value is the value today of some stream of net bene ts through time what it is worth today For example the present value of 1 received today is 1 the present value ofa 1 received a year from today is 11r where r is the discount rate and the present value of a 1 received a year ago is 11r The present value of n received t years from today is n 1 r In explanation r and the discount formula identify the rate at which the economic agent in question individual society etc trades off net bene ts of the same magnitude received today and in the future Consider the general formula for a net bene t of n in period t n1 r where t0 is the present tlt0 is t years in the future and tgt0 is t years in the past In explanation r and the discount formula identify the rate at which the economic agent in question individual society etc trades off net bene ts of the same magnitude received today and in the future1 1 As an aside one can also treat time as a continuous rather than a discrete ow In which case PV NZ30 dt where NBt is the net bene t at point in time t 0 Put simply discounting using the above formula assumes we discount such that present value is reduced by the same percent for each year the payment occurs in the future Maybe this is not how preferences work Ifr 10 the present value of 50000yr for 20 years starting now is 50000 50000110 500001102 5000011019 22500001 10 468250 50000 45454 41322 8175 This PV of this stream is less that 1 million because with a positive discount rate benefits received in the future are discounted worth less than if they were received today and discounted more the farther in the future they occur That is the discounter cares less about a net benefit in the future than they do about a net benefit of the same magnitude today and the farther in the future the less they care about it today Interestingly many students answered the question assuming the 20 payments would start next year rather than today This obviously leads to a smaller PV one losses 50000 for the payment today and gains 7432 for the payment 20 years from now 2 How much will you have in the bank after three years if you invest 1 in the bank today and the market rate of interest is 5 Continuing to assume a market rate of interest of 5 what is the present value of a 1 received four years from now Show all of your calculations and explain them in words Answer 11 051 051 05 11053 11576 The present value ofa 1 received four years from now is 11054 8227 3 Define the term social rate of discount and discuss its significance for environmental policy making 50008999 Argue that it is not worth it to allocate current resources to reducing global warming Argue that signi cant resources should be allocated to reducing global warming What if anything do you think should be done about global warming What is global warming what causes it and why List some possible bene ts of global warming Argue that it would be better to allocate resources to reducing poverty in those developed countries likely to be most effect by global warming than to allocate resources to reducing global warming What does a negative rate of discount imply A rate of zero How would you determine the present value of a stream of bene ts and costs Assume that the US must reduce the emissions of greenhouse gases to prel990 levels Suggest a method of accomplishing this task at minimum cost ef ciently and explain why it accomplishes the task at minimum cost Provide at least four reasons why the social rate of discount should be positive At what rate do you think society should discount the future Assume that the US must reduce the emissions of greenhouse gases to prel990 levels Discuss the ef ciency and equity implications of achieving this goal using a global permit system for greenhouse gas emissions C02 N20 and CH4 How might such a system work Would such a system require different permits for different gases As part of your discussion consider the ef ciency equity and political implications of different rules for distributing the permits Why are market rates of interest positive Is global warming the result of a market failure If so what kind and why Are automobiles a signi cant contributor to the production of greenhouse gases If so how and why What would need to be done to reduce their contribution Suggest a feasible method of reducing the amount of C02 emissions produced by cars Why are car makers concerned about policies to reduce the rate of global warming Is the cost of global warming a function of the rate of warming Yes or no and explain why 20 Brie y outline how the costs and bene ts of global warming are likely to be distributed by location income level and generation 21 Are greenhouse gases stock or ow pollutants What are the policy implications of your answer 22 Is there anything good about that fact that greenhouse gases are global pollutants As part of your answer de ne global pollutants 23 Could some pollutants partially offset the impact of increasing concentrations of greenhouse gases on global warming I 24 Is the marginal cost of J 39 the 39 39 of gases likely greater or smaller in developing versus developed countries Why What are the implications for reducing these emissions in the minimum cost way 25 Assume signi cant resources should be allocated to reduce CO2 emissions Where should they be allocated on ef ciency grounds and why Assume your audience is students in a principles micro course Convince them of your answer Is your conclusion as to where fair Discuss Answer Put simply the resources should be allocated so that they maximize the resulting reduction in CO2 emissions That is where the marginal cost of reducing CO2 emissions are the smallest Ef ciency dictates that one minimizes the cost of whatever CO2 reduction occurs or said another way for a given expenditure on CO2 reduction ef ciency dictates that the amount of the reduction be maximized This implies that a lot of the reduction in emissions should occur where emissions are the result of primitive technologies technologies that are carbon intensive rather than capital intensive This will likely be in developingpoor countries where production tends to be more carbon intensive Capital is relatively more expensive in poor countries A technology is more carbon efficien if it uses less carbon fuels to produce the same amount of stuff be it products warm homes or cooked meals Is this fair It depends on who is paying for the resources If it is the poor country yes it would be unfair by the standards of many If the cost is being paid by rich countries no Some points The question asked whether funds should be allocated A better word than funds would have been resources That is implicit in the question is where to allocate resourcesfunds The question is not about raising the costs of burning carbonbased fuels through taxes etc That might be part of the best way to reduce the stock of C02 in the atmosphere but is not what the question asked about One possible answer is that one should allocate the resources where they will lead to the biggest decrease in emissions Great Then the answer notes that is where the technologies use for production are the most carbonintensive Great so far Then add that you don t know where that is and argue that a worldwide permit system would bring about the reduction in at minimum cost While the last point is correct I am somewhat uncomfortable with this answer because the question asked about allocating fundsresources not about permits or taxes Christina 7 added Many students answered the question in terms of permits and not resources Also many students understood that it would be efficient to reduce C02 in developing countries because the technology is more carbonintensive there but didn39t necessarily understand that meant the MC of reducing carbon emissions was lower there which was in fact the reason why reducing C02 was more efficient there Also many students neglected to answer the fairness issue altogether which also followed from the fact that many students based their arguments on developing a permit system and out of those students who did answer the fairness question very few actually noted that fairness could be achieved depending on who pays for the emission reductions Most of them just said it wasn39t fair or that fairness was a normative issue and was unimportant Some General Question 26 Are uniform emissions standards costeffective for achieving a given amount of emissions reduction Discuss 27 Write a short essay that discusses from a regulatory perspective the distinction between fund and stock pollutants

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