Question Amanda Izquierdo 5064295

08 Jun Question Amanda Izquierdo 5064295

Question
Amanda Izquierdo

5064295

ECP 3302: INTRODUCTION TO ENVIRONMENTAL ECONOMICS

HOMEWORK 1

Write down your name and panther id and submit your answers in the Blackboard Drop Box as a word document by the due date.

Application 1:Open Access and Logging (application 3. 1 in your textbook)

The following data refers to the number of logging operations working in a stretch of tropical rainforest. Excluding externalities, the private cost of a logging operation is $25 thousand per week and logs sell for $1 a piece.

Fill in the chart below.

# of operations

Total Harvest

Average Harvest

Marginal Harvest

(1000 logs)

(1000 logs)

(1000 logs)

0

0

–

–

1

40

40

40

2

75

37.5

35

3

105

35

30

4

130

32.5

25

5

150

30

20

6

165

27.5

15

7

175

25

10

8

180

22.5

5

9

182

20.2

3

Now answer the following questions

1. What is the number of logging operations in the forest that maximizes total profits in the industry (ignoring externalities)? How much total resource rent is generated at this level of harvest? (hint: maximum profit occurs where marginal private cost equals marginal private benefit; rent is the difference between total revenue/benefit and total cost). 4 and rent would be 15+15=30.

2. With open access to the forest, how many operations will wind up logging? With open access, will there be any resource rent earned by the loggers? (hint: under open access loggers consider the average revenue/benefit). 7 and no there will not

3. Suppose the externalities (e.g. loss of genetic material for medical/agricultural applications; release of carbon-dioxide stored in the “carbon sink” of the forest) associated with deforestation could be valued at $10,000 per operation. What is the efficient number of operators? What is the open access number of operators? (hint: with externality efficient number of operations occurs where marginal social cost (i.e., previous MC+ 10K) equals marginal benefit; social aspect of externality is ignored under open access). 2 and 7

4. Suppose access to the forest is controlled by a (perfectly enforced) fee system. What (weekly) fee would have to be charged to insure an efficient harvest level? (hint: consider the value of externality per operation in setting up the fee). Operation cost would rise to eliminate profit beyond the efficient level. Average harvest is 37.5 and the marginal is 35. A tax between 10 and 12.5 would rise costs, discourageing the 3rd person from entering.

Application 2:Demand Curves for Public Goods (application 3.3 in your textbook)

Adam and Eve live on two sides of the Garden of Eden, a small suburban development. After they move in, an old PCB dump is discovered in between their houses. If X total tons of PCB’s are removed from the dump, the two have a true willingness to pay (WTP) to finance a clean-up equal to: ADAM’s WTP = 10 – X and EVE’s WTP = 6 – X

a. Adam’s WTP is higher than Eve’s. Does this necessarily imply that Eve is less concerned about exposure to PCB’s than Adam? Why or why not? Adam could be richer than Eve.

b. Draw one diagram illustrating the two individual’s demand curves for clean-up, and the total demand for clean-up in the neighborhood (see demand for public good in figure 3.5 in your textbook, p. 41). What is the total WTP for 3 tons of clean-up?

Eve’s line on my graph in the line under $6, the rest are Adams and the double line is their WTP combined. 3tons of clean up would equal to a 10 WTP.

c. If cleaning up 2 tons were to cost $12, is their sufficient WTP in this small community to finance it? What are two potential reasons why a voluntary clean-up might nevertheless fail?

Yes the WTP would be 12, they would fail because of free riding and transaction costs.

Application 3:The Stray Cow Problem

Rancher Roy has his ranch next to the farm of farmer Fern. Cattle tend to roam and sometimes they stray onto Fern’s land and damage her crops. Roy can choose the size of his herd. His revenues are $6 for each cow he raises. The schedules of his marginal cost of production (MCP) and the damage each additional cow creates (marginal cow damage or MCD) are given below.

# of Cattle

MCP

MCD

1

$3

$1

2

3

2

3

4

3

4

5

4

5

6

5

6

7

6

Farmer Fern can choose either to farm or not to farm. revenue is $12 when there are no cattle roaming loose. reduced by the amount in the MCD column above.

Her cost of production is $10, and her For each additional cow her revenue is

To answer the following questions, you need to figure out four things: the profit maximizing number of cows for Roy to own, his profits, whether or not Fern will farm and what her profits will be. Remember that efficient outcomes maximize the net monetary benefits to both parties; in other words, total ranching plus farming profits.

1. What will be the outcome if there is no liability (Roy does not pay for any damages caused)?

Rancher

# cattle

MCP

MCD

MR

MC

1

$3

$1

$6

$3

2

3

2

6

3

3

4

3

6

4

4

5

4

6

5

5

6

5

6

6

6

7

6

6

7