Classwork 9

Dynamic Efficiency, Discounting, and the SCC

1) Multiple-Choice

Q1. Why do we discount future outcomes?

a) Future generations matter less
b) Resources today have opportunity cost (consume/save/invest)
c) We can’t measure the future
d) Future values are always smaller

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Q2. Which example is dynamically inefficient?

a) Investing in flood barriers with decades of protection
b) Overharvesting a fishery, cutting future yields
c) Planting trees that mature over 20 years
d) Funding early education with long-run gains

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Q3. If the discount rate is very high, which project type becomes least attractive?

a) Long-term benefit projects
b) Short-term payoff projects
c) Projects with immediate costs
d) Any project with public funding

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Q4. Project A pays mostly now; Project B pays more but in 20 years. Which factor determines which looks “efficient”?

a) The project titles
b) Whether costs are public or private
c) The chosen discount rate
d) The number of stakeholders

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Q5. A climate policy looks good at 1% but not at 7%. What does that reveal?

a) It has only short-term benefits
b) Its value is driven by long-term benefits
c) Costs are far in the future
d) It’s unethical

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Q6. Which approach gives more weight to future generations?

a) Ethical / Prescriptive
b) Market-Based / Descriptive
c) They’re identical
d) Neither

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Q7. Town sea wall: costly now, prevents big losses later. With a high discount rate, the town will likely…

a) Build now
b) Delay or skip building
c) Build it twice as tall
d) Ban waterfront living

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Q8. If policymakers ignored discounting entirely, they would tend to…

a) Overinvest in very long-term projects
b) Underinvest in very long-term projects
c) Make no difference
d) Always choose the cheaper project

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Q9. Which statement best captures dynamic efficiency?

a) Choose the cheapest project now
b) Maximize benefits this year only
c) Maximize total net benefits across time
d) Always delay decisions

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Q10. A lower social discount rate (e.g., 1–2%) generally…

a) Devalues future outcomes
b) Treats future as irrelevant
c) Always rejects climate projects
d) Gives more weight to long-run benefits

2) Short-Answer

• Why is it difficult to agree on a single “right” discount rate, and how does this choice reflect ethical judgments about future generations?

• How should economists and policymakers balance economic efficiency with intergenerational fairness when evaluating climate policies?

• Should the Social Cost of Carbon (SCC) reflect global climate damages or only domestic ones? What are the ethical and policy implications of each approach?

• Why might different administrations adopt different SCC values or modeling assumptions? What does this reveal about the role of value judgments and policy priorities in economic analysis?