New Estimate of the Elasticity of Marginal Utility of Consumption for Europe: Implications for the Social Discount Rate

Milan Ščasný () and Matej Opatrny

No 2022/29, Working Papers IES from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies

Abstract: We provide the first estimate of the elasticity of marginal utility of consumption, µ, for Europe and for thirty individual European countries, using the income-tax individual-level data. Specifically, we rely on the absolute equal-sacrifice approach and CRRA utility function to elicit the revealed preferences of income tax payers on their acceptance of the tax schedule. Our central estimate of µ equals to 1.42. With few exceptional cases, µ´s for European countries exceed unity, ranging between 1.2 and 1.90. We further discuss the implications of our estimate of µ for the social discount rate and Social Cost of Carbon. We conclude that the social discount rate might be slightly higher than traditionally assumed, implying lower magnitude of Social Cost of Carbon, at least for Europe.

Keywords: elasticity of marginal utility of consumption; equal-sacrifice approach; income tax schedules; marginal tax rate; social discount rate (search for similar items in EconPapers)
JEL-codes: D60 D61 H24 R13 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2022-12, Revised 2022-12
New Economics Papers: this item is included in nep-eec, nep-eur, nep-pbe, nep-pub, nep-tra and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:fau:wpaper:wp2022_29

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