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Now or Never: Environmental Protection under Hyperbolic Discounting

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Author Info
Ralph Winkler () (Center of Economic Research (CER-ETH) at ETH Zurich)

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Abstract

In this paper, we extend the well known result that hyperbolically discounting agents tend to postpone costs into the future. In a simple model we show that, without commitment to the ex ante optimal plan, no investment in environmental protection is undertaken over the whole time horizon, no matter whether the decision makers are naive or sophisticated, although investment seems optimal in the long run from every generations point of view. This result questions the application of hyperbolic discounting in cost-benefit analysis and gives rise to concern, as it is consistent with unsatisfactory policy performance in solving long-term environmental problems.

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Paper provided by CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich in its series CER-ETH Economics working paper series with number 06/60.

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Length: 26 pages
Date of creation: Oct 2006
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Handle: RePEc:eth:wpswif:06-60

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Related research
Keywords: environmental policy; environmental protection; hyperbolic discounting; intertemporal decision theory; procrastination; time-(in)consistency;

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Find related papers by JEL classification:
Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
D90 - Microeconomics - - Intertemporal Choice and Growth - - - General
D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

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References listed on IDEAS
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  1. Yohe, Gary W. & Tol, Richard S. J. & Anthoff, David, 2009. "Discounting for Climate Change," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 3(24), pages 1-22. [Downloadable!]
    Other versions:
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