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exam 2 review

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exam 2 review

- 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

- efficiency pricing:
Pt = MECt+MUCt

- where
- MEC: Marginal Extraction Cost
- MUC: Marginal User Cost

- 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

energy: efficient vs. market 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

- balance btw users
- marginal net benefit equal across users

- handle variability
- above-average and below-average flows must be accommodated

- 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

forests: biological harvest rule

- MAI = cumulative volume end of decade /
cumulative yrs of growth

- harvest when MAI maximized

- harvest at age that maximizes PV of net benefits
- planting costs
- borne immediately
- no discounting

- harvesting costs
- time of harvest
- discounted

AgeVolume (cubic ft)

11700

211,000

313,000when to harvest

416,000using biological rule?

518,000using economic rule?

Price: $2

Planting cost: $1,000

Harvest cost: $0.50

Discount rate: 3%

- 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

- biology: “maximum sustainable yield” (MSY)
- yields maximum growth
- largest catch that can be perpetually sustained

- economics: maximize net benefit

- 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

- 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?)