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New Estimate of the Elasticity of Marginal Utility of Consumption for Europe: Implications for the Social Discount Rate

Author

Listed:
  • Milan Scasny

    (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)

  • Matej Opatrny

    (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)

Abstract

We provide the first estimate of the elasticity of marginal utility of consumption, µ, for Europe and for thirty individual European countries, using the income-tax individual-level data. Specifically, we rely on the absolute equal-sacrifice approach and CRRA utility function to elicit the revealed preferences of income tax payers on their acceptance of the tax schedule. Our central estimate of µ equals to 1.42. With few exceptional cases, µ´s for European countries exceed unity, ranging between 1.2 and 1.90. We further discuss the implications of our estimate of µ for the social discount rate and Social Cost of Carbon. We conclude that the social discount rate might be slightly higher than traditionally assumed, implying lower magnitude of Social Cost of Carbon, at least for Europe.

Suggested Citation

  • Milan Scasny & Matej Opatrny, 2022. "New Estimate of the Elasticity of Marginal Utility of Consumption for Europe: Implications for the Social Discount Rate," Working Papers IES 2022/29, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Dec 2022.
    • Handle: RePEc:fau:wpaper:wp2022_29
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    File URL: https://ies.fsv.cuni.cz/en/research/working-papers/6716
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    More about this item

    Keywords

    elasticity of marginal utility of consumption; equal-sacrifice approach; income tax schedules; marginal tax rate; social discount rate;
    All these keywords.

    JEL classification:

    • D60 - Microeconomics - - Welfare Economics - - - General
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies

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