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    Question

    Why is the choice of the social discount rate

    crucial and often contentious in the economic analysis of long-term environmental projects (e.g., climate change mitigation)?
    A A high discount rate makes future costs look smaller, leading to more investment. Correct Answer Incorrect Answer
    B A higher social discount rate heavily downweights (reduces the present value of) the large future costs of environmental damage, potentially justifying less immediate action (abatement). Correct Answer Incorrect Answer
    C A high discount rate ensures that inter-generational equity is maintained. Correct Answer Incorrect Answer
    D A lower discount rate is only used for private sector cost-benefit analysis. Correct Answer Incorrect Answer

    Solution

    Solution: The social discount rate is used to convert future costs and benefits into a Present Value (PV). When dealing with long-term problems like climate change (where benefits of mitigation are decades away), a high discount rate drastically shrinks the PV of those future benefits. This makes taking immediate, costly action to combat global warming appear less economically rational than postponing action. Environmentalists and economists (e.g., Stern Review) often argue for a very low or near-zero social discount rate to better reflect inter-generational responsibility.

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