Transcript exam 1 review

exam 2 review
resource economics
• nonrenewable vs. renewable
– maximize pv of net benefit
– renewable includes growth functions
• characterize efficient allocations
• compare to market allocations
• discuss policy to make market allocations
more efficient
start with the price equation
• efficiency pricing:
Pt = MECt + MUCt
• where
– MEC: Marginal Extraction Cost
– MUC: Marginal User Cost
MUC and Q over time
• efficient MUC rises, reflecting increasing scarcity
• in response, Q extracted falls over time until
reaching zero, when total MC = highest WTP
(“choke price”) or reach backstop MC
• efficiency requires smooth transition to
exhaustion of resource
constant MEC with no substitute
energy:
energy:efficient
efficientvs.
vs.market
market outcomes
outcomes
vulnerability premium
water efficient allocations:
surface vs. groundwater
• surface water
– how to allocate a renewable supply among
competing uses
– intergenerational effects less important (future
supplies depend on natural phenomenon, e.g.
rain, rather than current allocation)
• groundwater
– withdrawing now affects future supply
efficient allocation: surface water
1. balance btw users
•
marginal net benefit equal across users
2. handle variability
•
above-average and below-average flows
must be accommodated
efficient allocation: groundwater
• if withdrawal > recharge, eventual exhaust resource
• MEC rises over time as water table falls
• pumping would stop:
– no water left
– MC pumping > benefit of water or MC of backstop resource
(desalination)
• price rises over time until choke price or switch point
utilities pricing:
inverted block & seasonal rates
(potentially efficient)
forests: biological harvest rule
• MAI = cumulative volume end of decade /
cumulative yrs of growth
• harvest when MAI maximized
biological harvesting decision
economic harvesting rule
•
harvest at age that maximizes PV of net
benefits
1. planting costs
•
•
borne immediately
no discounting
2. harvesting costs
•
•
time of harvest
discounted
sample problem
Age
11
21
31
41
51
Volume (cubic ft)
700
1,000
3,000
6,000
8,000
Price: $2
Planting cost: $1,000
Harvest cost: $0.50
Discount rate: 3%
when to harvest
using biological rule?
using economic rule?
optimal harvest age
• discounting shortens optimal harvest time
– less tolerant of slow timber growth
– comparing no harvest (increase in value of
timber) to harvest (sell and invest)
• high discount rates also destroy incentive
to replant
fisheries:
biological vs. economic harvest
• biology: “maximum sustainable yield”
(MSY)
– yields maximum growth
– largest catch that can be perpetually
sustained
• economics: maximize net benefit
too much effort! policy responses
• increase MC– require fishing farther from shore, use
smaller nets, boats, or motors
– but artificially increasing cost inefficient
• total allowable catch – restrictions on effort or size of
catch
– monitoring, enforcement difficult, also creates race to catch
• individual transferable quotas –quotas allocated, then
trade
– no race, allows most efficient fishers to buy rights from inefficient
fishers
sample problem
• Costs fisher $20 to fish salmon
• Salmon sells for $10
• Harvest rate given X fishers is
S = 30X-2X2
• How many people will go fishing, how many
salmon will be caught, and what are total profits
under
– Open access
– Limited entry (how many fishers should be allowed to
maximize profit?)