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Choosing a Discount Rate for a Climate Adaptation Project
A coastal city is considering a multi-billion dollar project to build a sea wall. The costs of construction are immediate and certain. The primary benefit—protecting the city from a catastrophic storm surge predicted to become more likely in 50-100 years—is distant and uncertain, but potentially immense. Two advisors offer conflicting recommendations on how to evaluate the project:
- Advisor A argues for using a very low discount rate. They contend that the well-being of future generations is equally as important as the well-being of the current generation, and that we have an ethical duty to protect them from a preventable catastrophe.
- Advisor B argues for using a higher discount rate, similar to the expected return on other long-term public investments. They argue that future generations will be wealthier and have better technology, and that spending billions now prevents that money from being invested in other areas (like education or R&D) that could generate greater overall benefits for the future.
Critically evaluate the arguments of both advisors. Justify which approach you believe is more appropriate for this decision, and explain how the choice between a high and low discount rate would likely affect the project's approval.
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Choosing a Discount Rate for a Climate Adaptation Project
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