1. What are some of the factors that could make social user costs different from
ID: 2494588 • Letter: 1
Question
1. What are some of the factors that could make social user costs different from private user costs in the case of mineral extraction? a. Graphically and mathematically illustrate how, in a two period model of a nonrenewable resource, economic efficiency in the presence of a positive rate of discount implies increased consumption today and higher prices and lower consumption tomorrow than would be observed with a discount rate of zero. b. Graphically and mathematically illustrate how user cost is affected by the expectation that future demand for a resource will shift outward on today’s efficient rate of extraction(20 points) 2. Let D equal the domestic demand for oil, Sd equal the domestic supply and Si equal imported supply of oil for gasoline. Assume the world supply is infinitely elastic and the domestic supply is more price sensitive. Assume we currently import some oil and produce some for the domestic market. a. Graphically illustrate the scenario above. b. Our domestic policy objective is to ‘minimize dependence on imported oil.’ Illustrate the effect of 1) an import tax on oil, 2) a domestic oil subsidy, and 3) domestic investment in hydrogen powered vehicles could meet that policy objective. Discuss the welfare implications of each policy option. c. If the discovery of more domestic oil near the surface makes the domestic supply curve more elastic, show graphically what happens to the effectiveness of the interventions in part b to meet our domestic policy objective (20 points). 3. Let V0 = the value of wood harvested this year; V1 = the value of wood harvested next year; DV = V1 - V0; C = harvest costs; r = the discount rate; S = the present value of all future net benefits when forest is harvested respecting an optimal rotation period; and t = the time period. We know that DV = (V0 – C) r + Sr describes the decision to cut wood now versus next year. a. Provide a graphical illustration of this model, show and discuss when it is socially optimal to wait to harvest timber, when it is optimal to harvest timber, and when it is past the optimal timber harvesting time period. b. Indicate the effect of an increase in each of the model variables on the socially optimal timing (e.g. earlier, later or ambiguous) of timber harvest (20 points). 4. a. Following class discussions and the text, provide a fully labelled graphical illustration of the theoretical relationship between fishing effort and revenue. b. Define and identify maximum fish stock, zero fish stock, maximum sustainable yield, the socially optimal rate of harvest and the open access solution. c. Define and identify the resource rents and in situ value. d. Discuss what causes these three possible harvest rates to differ and the implications of each harvest rate on the health of the fishery (20 points). 5. A piece of land has a market value of $2000 per acre, if used for agricultural purposes. A land ‘speculator’ buys the land, paying $3000 an acre. Five years later she sells it to a house builder for $7,000 an acre. The builder builds a house for $50,000 and sells it (and the land on which it sits) to a homeowner 2 yrs later for $68,000. Assuming the land market and housing market are both competitive and that there was no inflation, what is the total land rent in houses and how was that rent distributed among farmer, speculator, builder and homeowner? (20 points) 6. Consider the following illustration of land rents for alternative land uses. The farmer is the land owner and she would like to sell her land. a. Calculate the land value per hectare in farming (W, Y) and in housing (X, Z) from the farmer’s and society’s perspective. b. What is the economically optimal land use from the farmer’s perspective? society’s? Why? c. What are at least 3 potential policy alternatives available to ‘society’ (local government or civic organization) to achieve the societal optimum and who gains/loses by how much by employing these options? (20 points) Land useFarmerSociety Annual land rents Ag300600 Housing500500 Land price per hectare (r=0.05; PV=R/r) AgW=Y= HousingX=Z= 7. Show (graphically) and explain (verbally) the theoretical land price gradient between commercial, residential, and agricultural uses of lands. Do we observe this theoretical relationship in Colorado’s Front Range? Why or why not? How might a land use planning tool such as a conservation easement be used to influence land use on the agriculture-residential margin on the gradient? Discuss at least three of the policy options reviewed in the land use research discussion in class and their likely distributional equity implications (20 points) 8. Municipal water supplies are often managed by a government agency. Typically, government agencies are not allowed to ‘make a profit.’ a. Assuming supply and demand behave ‘normally,’ graphically illustrate the implications of a governmental ‘cost recovery’ mandate on the water market. b. Precisely identify the welfare effects of water management under these conditions relative to profit maximization. Use the concepts of Marginal Cost, Marginal Benefit, Average Cost, Average Benefit, Total Cost and Total Benefit in your answer. (20 points) 9. a) Water rights, markets and rates are often tied to their intended use (e.g. commercial, agricultural, and residential) and out of use or out of basin water transfers are often prohibited. Why? b) Graphically and mathematically demonstrate how creating a market for trading water rights across uses (residential vs agricultural) could potentially increase the welfare (economic efficiency) of water allocation decisions. Assume water prices are high in residential use and low in agricultural use. (20 points) 10. Suppose a farmer (A) faces the payoff matrix below to describe the income she would derive from her choice of pesticide use relative to the choices of other farmers. The reason for this payoff matrix is the development of pesticide resistance due to high levels of pesticide exposure. Describe the situation the illustrated by the payoff matrix and discuss how the economics of pesticide resistance parallel the economics of fisheries management. (20 points) Return on $1 investment of pesticide application Other farmers Low usage High usage Farmer A Low usage $10 $5 High usage $15 $7
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