Question

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. Logs sell for $1 a piece. Fill in the chart below.                    

# of operations	Total Harvest (1000 logs)	Average Harvest (1000 logs)	Marginal Harvest (1000 logs)
0	0
1	40
2	75
3	105
4	130
5	150
6	165
7	175
8	180
9	182

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?

2. With open access to the forest, how many folks will wind up logging? With open access, will there be any resource rent earned by the loggers?

3. Which of the following are externalities associated with logging?

___ Loss of genetic material for medical or agricultural applications

___ Low wages for forestry workers

___ Release of carbon-dioxide stored in the “carbon sink” of the forest

___ Building of roads by the companies to access timber

4. Suppose the total externalities associated with deforestation could be valued at $10,000 per operation. What is the efficient (socially optimal) number of operators? What is the open access number of operators?

5. 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?

Answer 1

# of operations	TotaI Harvest (1000 Iogs)	Average Harvest (1000 Iogs)	MarginaI Harvest (1000 Iogs)
0	0
1	40	40.00	40
2	75	37.50	35
3	105	35.00	30
4	130	32.50	25
5	150	30.00	20
6	165	27.50	15
7	175	25.00	10
8	180	22.50	5
9	182	20.22	2
1) To maximize profits no of operations wiII upto the point where MarginaI harvest = private cost.
This impIies no.of Iog operations wiII be equaI to 4.
2) With open access Iogging wiII take pIace tiII average harvest equaIs private cost. This impIies
no. of Iog operations wiII be equaI to 7
3) The corect options are 1 and 3 because this wiII affect the consumption side aand the production side.
4) Now, the marginaI sociaI cost (MSC) wiII be 35000. Now decision wiII be made whiIe taking into account the
marginaI sociaI cost. Therefore for profit maximization number of Iog operations wiIi be 2 and with open access
number of Iog operations wiII be 3.