Discounting: Intertemporal Arbitrage and Financial Evaluation

This lecture focuses on the concept of discounting in environmental economics, particularly intertemporal arbitrage. It begins by discussing the importance of evaluating costs and benefits that occur over time, emphasizing the need for a proper discount rate. The instructor explains how the choice of discount rate affects capital assessment and project evaluation. The lecture highlights the preference for immediate benefits over future ones, illustrated by the saying, "A bird in hand is worth two in the bush." This principle is further elaborated with examples of how individuals value immediate income versus future income. The instructor provides a practical example involving a bank account with a 2% interest rate, demonstrating how to calculate future values through compounding. The lecture concludes by reinforcing the significance of understanding how present and future values relate to decision-making in economics, particularly in the context of environmental projects.