Looking for someone who can respond to the following question below. Responses to the questions should be based on the scenario given.
Consider some discounting problems.
a. What is the present value of a $100m loss from an environmental catastrophe, 100 years in the future, if the discount rate is 2%? (You can choose your own rate of compounding.)
b. What is the present value of the same loss, if the discount rate is 1.5% because of lower growth rate trends? If 1%?
c. If a policy analyst is not certain which of the discount rates is appropriate, but believes there is an approximately equal chance of each outcome, is the average discounted present value appropriate? Does that imply a higher or lower discounted value than just using the average discount rate?
d. Suppose the best available models imply a link between discount rate and damages: if economic growth is slow then the damages would be $150m and the appropriate discount rate would be 1%; if economic growth is middling then damages would be $125m and a discount rate of 1.5% would turn out to be most appropriate; if growth is good then damages are $100m and the rate 2%. Carefully explain whether averaging is the best policy (you might cite readings on this topic). What is the present value of the loss in each case?