Present value and discounting
Wrap up the institutional discussion and begin Lecture 5. Put values at different dates on the same clock and examine what the discount rate changes. The week ends with the discount-rate material.
Focus
- Wrap-up of shared-aquifer institutions
- Present value and compounding
- Market interest rates and social discount rates
Prepare
- Briefly review Lecture 4, pages 34–36
- Read TL Chapter 6 and the resource-allocation web reading
- Bring a calculator for the intertemporal examples
Practice
- Design pumping, monitoring, and information rules
- Compare values at different dates using present value
- Explain how a higher discount rate changes the weight on future benefits
Guiding question
How can we compare benefits received today with benefits received by a later generation?
Learning targets
- Explain why transaction costs, information, and enforcement can limit liability and regulation.
- Design pumping and information rules for a shared aquifer.
- Use present value to compare resource benefits across dates.
- Explain how the discount rate affects the present value of future benefits.
- Distinguish a market interest rate from a social discount rate.
Lecture slides
Click inside a slide preview, then use:
- ←/→ or ↑/↓ to move through the slides;
- M to open the menu;
- F to enter fullscreen;
- E to enter or exit PDF export mode;
- Ctrl + Shift + F to search the slides;
- T to switch between light and dark mode; and
- Esc to exit the menu or fullscreen.
This week’s materials
TL refers to Tietenberg and Lewis, Natural Resource Economics: The Essentials, 2nd edition. Chapter numbers on this page follow that edition, not the larger Environmental and Natural Resource Economics textbook.
Reading: TL Chapter 6 — Dynamic Efficiency and Sustainable Development. For additional background on present value and discount rates, see the relevant sections of Chapter 3, Evaluating Trade-Offs: Benefit-Cost Analysis and Other Decision-Making Metrics. The web reading below provides worked examples.
Coming next
Week 6 develops the neodymium allocation model, user cost, scarcity rent, and Hotelling’s rule in Lecture 5. Classwork 5 and Homework 2 practice follow in Week 7.