The social discount rate is an important component in net present value (NPV) calculations for public policies related to stock externalities, but economists do not agree on which value to use for this rate. Suppose a recent study reports that the NPV of a proposed carbon tax intended to reduce carbon dioxide emissions is positive, but the annual net benefits do not become positive until 2060. The authors of the study used a social discount rate of 2%. What can we say about the findings of the study if the research were repeated with a higher social discount rate?
A) NPV would decline, and the annual net benefits would become positive after 2060.
B) NPV would increase, and the annual net benefits would become positive before 2060.
C) NPV would decline, and the annual net benefits would not change.
D) The findings of the study would not change.

Question

Quizplus · Accepted Answer

A higher social discount rate would decrease the present value of future benefits from reducing carbon dioxide emissions, thus lowering the NPV. This would result in the annual net benefits becoming positive at a later date, after 2060. Therefore, choice A is the correct answer.

The Social Discount Rate Is an Important Component in Net