Discounting in the Presence of Scarce Ecosystem Services

35 Pages Posted: 21 Feb 2019

See all articles by Xueqin Zhu

Xueqin Zhu

Wageningen UR

Sjak Smulders

Tilburg University

Aart de Zeeuw

Tilburg University - Department of Economics

Date Written: 2019

Abstract

Discounting has to take account of ecosystem services in consumption and production. Previous literature focuses on the first aspect and shows the importance of the relative price effect, for given growth rates of consumption and ecosystem services. This paper focuses on intermediate ecosystem services in production and shows that for limited substitutability and a low growth rate of these ecosystem services, the growth rate of consumption, and thus the discount rate, declines towards a low value. Using a Ramsey optimal-growth framework, the paper distinguishes three cases. If ecosystem services can be easily substituted, then the discount rate converges to the usual value in the long term. Secondly, if ecosystem services can be easily substituted in production but not in consumption, the relative price effect is important. Finally, and most interestingly, if ecosystem services cannot be easily substituted in production, the discount rate declines towards a low value and the relative price effect is less important. Another part of the previous literature has shown that a declining discount rate is the result of introducing several forms of uncertainty, but this paper reaches that conclusion from an endogenous effect on the growth rate of the economy.

Keywords: discount rate, ecosystem services, consumption value, production value, growth rate, Ramsey optimal balanced growth

JEL Classification: C610, D900, E430, O440, Q570

Suggested Citation

Zhu, Xueqin and Smulders, Sjak and de Zeeuw, Aart J., Discounting in the Presence of Scarce Ecosystem Services (2019). CESifo Working Paper No. 7514, Available at SSRN: https://ssrn.com/abstract=3338921

Xueqin Zhu (Contact Author)

Wageningen UR ( email )

Hollandseweg 1
Wageningen, 6706KN
Netherlands

Sjak Smulders

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

Aart J. De Zeeuw

Tilburg University - Department of Economics ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2065 (Phone)
+31-13-466-3042 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
18
Abstract Views
155
PlumX Metrics