Reference no: EM13551557

An activity to improve the well-being of some impoverished people will provide benefits of $1 million right now, but it will obliterate the earth in 200 years. The world's value in 200 years is projected at $1012 (i.e. $1000 billion). There are no costs or benefits between these two dates.

(a) Is it worth avoiding the world's destruction in 200 years at a 10 percent discount rate?
(b) Is it worth avoiding the world's destruction in 200 years at a 6 percent discount rate?
(c) If 10 percent is the interest rate in the private sector, what are some of the arguments for using a 10 percent discount rate?
(d) What are some of the arguments for a lower discount rate?
(e) Do you think discounting and benefit-cost analysis are appropriate ways to handle this problem? Why or why not?

Suppose that the benefits of cutting down the forest of Greenwood is $1 million now, but the environmental cost of that harvest is $10/year forever.

(a) The private market discount rate is 4 percent. On that basis, which options do you expect the government to choose?

(b) If the government has decided to use a discount rate of 0 percent for its environmental policies (no matter what the market rate is), would that change the government's decision?

(c) Which of these two approaches seems to make more sense in this case?