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Discounting and Welfare Analysis Over Time: Choosing the ç

  • Jan Schumacher
  • Wolfgang Buchholz

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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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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  1. Arrow Kenneth J, 2007. "Global Climate Change: A Challenge to Policy," The Economists' Voice, De Gruyter, vol. 4(3), pages 1-5, June.
  2. 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.
  3. Dasgupta, Partha, 2001. "Human Well-Being and the Natural Environment," OUP Catalogue, Oxford University Press, number 9780199247882.
  4. 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.
  5. 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.
  6. 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.
  7. Tjalling C. Koopmans, 1959. "Stationary Ordinal Utility and Impatience," Cowles Foundation Discussion Papers 81, Cowles Foundation for Research in Economics, Yale University.
  8. Pasquale Scaramozzino & Giancarlo Marini, 2000. "Social time preference," Journal of Population Economics, Springer, vol. 13(4), pages 639-645.
  9. 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.
  10. 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.
  11. 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.
  12. John Creedy, 2006. "Evaluating Policy: Welfare Weights And Value Judgements," Department of Economics - Working Papers Series 971, The University of Melbourne.
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