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Discounting and Welfare Analysis Over Time: Choosing the ç

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  • Jan Schumacher
  • Wolfgang Buchholz

Abstract

Based on the Ramsey equation and an ethically motivated rejection of pure utility time discount, the Stern Review on the Economics of Climate Change concentrates on the use of the elasticity of marginal utility ç in the intergenerational social welfare function. We support this position by showing that, also from the view point of sustainability, application of ç is preferable to the use of the pure time discount parameter ñ when a balanced distribution of utility across generations is to be brought about. After reviewing empirical studies on the size of ç we develop a novel axiomatic approach based on non–envy criteria by which we obtain values for ç lying in a range between 1 and 2. Whereas the starting point of the Stern Review quite explicitly is an ethical one, many critics of the Review deny this ethical stance and thus – as described in our paper – miss a crucial element of the Stern Review.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2230.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2230

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Keywords: Ramsey equation; discounting; sustainability; non-envy;

References

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  1. Tjalling C. Koopmans, 1959. "Stationary Ordinal Utility and Impatience," Cowles Foundation Discussion Papers 81, Cowles Foundation for Research in Economics, Yale University.
  2. David J. Evans & Haluk Sezer, 2005. "Social discount rates for member countries of the European Union," Journal of Economic Studies, Emerald Group Publishing, vol. 32(1), pages 47-59, January.
  3. Arrow Kenneth J, 2007. "Global Climate Change: A Challenge to Policy," The Economists' Voice, De Gruyter, vol. 4(3), pages 1-5, June.
  4. John Creedy, 2006. "Evaluating Policy: Welfare Weights And Value Judgements," Department of Economics - Working Papers Series 971, The University of Melbourne.
  5. Pasquale Scaramozzino & Giancarlo Marini, 2000. "Social time preference," Journal of Population Economics, Springer, vol. 13(4), pages 639-645.
  6. Olof Johansson-Stenman & Fredrik Carlsson & Dinky Daruvala, 2002. "Measuring Future Grandparents" Preferences for Equality and Relative Standing," Economic Journal, Royal Economic Society, vol. 112(479), pages 362-383, April.
  7. David Pearce & Ben Groom & Cameron Hepburn & Phoebe Koundouri, 2003. "Valuing the Future," World Economics, World Economics, Economic & Financial Publishing, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 4(2), pages 121-141, April.
  8. William D. Nordhaus, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 686-702, September.
  9. Gollier, Christian, 2006. "An Evaluation of Stern's Report on the Economics of Climate Change," IDEI Working Papers 464, Institut d'Économie Industrielle (IDEI), Toulouse.
  10. Dasgupta, Partha, 2001. "Human Well-Being and the Natural Environment," OUP Catalogue, Oxford University Press, number 9780199247882, September.
  11. Martin L. Weitzman, 2007. "A Review of the Stern Review on the Economics of Climate Change," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 703-724, September.
  12. Ng, Yew-Kwang, 1987. "Relative-Income Effects and the Appropriate Level of Public Expenditure," Oxford Economic Papers, Oxford University Press, vol. 39(2), pages 293-300, June.
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Cited by:
  1. Malakhov, Sergey, 2014. "Money flexibility, price elasticity, and elasticity of marginal utility of consumption," MPRA Paper 55928, University Library of Munich, Germany.
  2. Wolfgang Buchholz & Jan Schumacher, 2008. "Discounting the Long-Distant Future: A Simple Explanation for the Weitzman-Gollier-Puzzle," CESifo Working Paper Series 2357, CESifo Group Munich.
  3. Éva Pálinkó & Márta Szabó, 2012. "Application of Social Discount Rate in Public Projects," Public Finance Quarterly, State Audit Office of Hungary, vol. 57(2), pages 184-199.

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