Question

Climate Change Discounting Suppose the government can convert all of its gasoline vehicles to electric this year at a cost of $50 million. Environmental economics students at the University of Oregon have estimated that this switch will reduce damages from climate change by $500 million dollars in 50 years. The government will go through with the switch if the present value of those benefits outweigh the costs. Note: For simplicity, we have assumed that the benefits in 50 years are the only benefits generated by this policy. In reality, such a policy would create a stream of benefits over many years. Give the general formula for calculating present value (PV)?

Answer 1

The present discounted value is used to assess the value of future benefits in today's terms using a formula PV = FV / (1 + r)^n. In the example provided, this formula helps determine if converting gasoline vehicles to electric at a cost of $50 million is worth the $500 million in benefits after 50 years.

Step-by-step explanation:

Climate Change Discounting involves comparing the present costs of actions like reducing emissions to their long-run future benefits using the concept of present discounted value (PDV). The general formula for PDV, which can assess the environmental policy of converting gasoline vehicles to electric, is given by:

PV = FV / (1 + r)^n

Where PV is the present value, FV is the future value of the benefits or cash flows, r is the discount rate (or interest rate), and n is the number of years in the future when the benefit will be received. Using this formula, the government or any other entity can determine whether the benefits in future monetary terms are worth the costs incurred today. When applied to the scenario given, if the present value of the $500 million expected in 50 years is greater than the $50 million cost today, the government would go ahead with the policy.