Question

1. Analyse and explain the below statement from Oran Young’s book of International Cooperation

“actors…who employ reasonably low discount rates in computing the present value of future benefits…”

2. How can this be connected with a macro project that aims to break down oxygen and water from the moon crest and bring the same to the earth surface along with focusing on creating a livable space station in moon for refueling the spaceships travelling from earth to moon & back to earth. Explain in detail

Answer 1

Question 1 : Answer

The “Market Power” comment uses financial rates of return affected by monopoly power to suggest that the correct discount rate should be lower when the rate used by banks with monopoly power are used to calculate the discount rate. The authors state that these bank rates will be higher than the competitive rate and the social discount rate will thus be overstated unless corrected. While this is of course true, the social cost of government spending is not determined using such financial rates nor by monopoly power. Rather, as is normally the case in welfare economics, we look at the marginal social cost of funds, which reflects the willingness to pay (demand price) of the displaced demanders of funds and the willingness to accept (supply price) of the induced suppliers of funds.

Consider also the simple case of a small open economy in which thesupply of funds is perfectly elastic, and there is no taxation and no monopoly. An increase in government borrowing to finance project spending will neither crowd out consumption nor private investment. Instead it will increase the financial deficit and crowd out net exports dollar for dollar. The government discount rate nevertheless would not equal the cost of borrowing unless there was no risk. The default risk would be borne by U.S. economy in terms of higher future borrowing costs, or absent default, U.S. taxpayers would bear the risk of higher taxes in the future to service the increased debt. Thus even if the government could borrow from the Chinese at 4%, the economic cost of borrowing exceeds the 4% rate. In our opinion the best way to calculate the economic cost of borrowing when the supply of funds is perfectly elastic is to calculate the annual rate of return foreign investors have received in the U.S. net of U.S. taxes. Thus if the pre-tax rate of return is 8.5% and the corporate tax rate is 35% with no withholding taxes, the net return would be 5.5% and this would be the SOC. This calculation is uninfluenced by the loan rate offered by banks, monopoly or otherwise

Question 2 : Answer

Moon-water-as-fuel is appealing, but it won’t be easy to start mining water in space. First, there needs to be an extensive prospecting campaign. Thanks to the PNAS study, researchers have basically created a map showing where to find the juiciest chunks of water ice at the lunar poles. The next step is to send landers and rovers to those areas to figure out the best location to target and what the consistency of the ice is. Scientists still don’t know if the ice is in the form of slush mixed in with the dirt or if it’s like solid bricks fused together with other surface material. “We know how to design the equipment to extract it. We just don’t know which set of equipment to use One idea is scooping up the lunar soil with an excavation robot that hauls the materials to a processor. That processor then separates the ice from the soil through heating and breaks the water into its basic parts with electricity. Some of the resulting fuel is then used to launch the rest of the water off of the Moon on a transport vehicle, sending it to whatever propellant depot needs it in space.