Question

1) Assuming an inverse demand (marginal benefit) equation of P = 1300 ? 0.4Q, and a supply (marginal cost) equation of P = 200, a. If there are 1,000 units of the resource to be allocated between two years, in a dynamic efficient allocation, how much would be allocated in the first year and how much would be allocated to the second year if the discount rate is 35%? (5 points) b. What would be the efficient price in the two periods? (5 points) c. What would be the scarcity value (also called marginal user cost) in each period? (5 points) d. Would the static and dynamic efficiency criteria yield the same answers for this problem? Why? (5 points) 2) Search the internet for at a price dataset of at least 20 years for a nonrenewable resource of your choosing. a. Draw out (using the same format as page 8 of the handout from lecture) a general demand function, price path and extraction path that Hotelling’s rule predicts for nonrenewable resources. (7 points) b. Does the data you found follow Hotelling’s prediction? Do a little research on the industry and discuss what you think is driving trends in prices over time. (10 points) c. Attach the time plot of prices. (3 points) 3) One major concern about the future is that water scarcity will grow, particularly in arid regions. Will our institutions (current state of government/policy) provide for an efficient response to this problem? To think about this issue, let’s consider groundwater extraction over time. a. Suppose the groundwater comes from a well you have drilled upon your land that taps an aquifer that is not shared with anyone else. Would you have an incentive to extract the water efficiently over time? Why or why not? (5 points) b. Suppose the groundwater is obtained from your private well, which is drilled into an aquifer that is shared with many other users who have also drilled private wells. Would you expect that the water from this common aquifer be extracted at an efficient rate? Why or why not? (5 points)

Answer 1