Environmental Economics Homework 7
Q1. The diagram below is from lecture, pertaining to the quantity extracted of a nonrenewable resource. Suppose the resource is copper. Suppose a substitute for copper is brought to market this year. Show on the diagram the effect of this substitute on this year's price of copper and the quantity of copper extracted (hint: the effect on price is clear. The effect on quantity is ambiguous).
2. Answer the following true/false/uncertain questions (T/F/U). If you state "uncertain" provide an explanation.
a. Hotelling's rule indicates that the price of nonrenewable resources rises over time.
b. Historically real world prices of nonrenewable resources have generally followed Hotelling's Rule.
c. The marginal user cost of nonrenewable resource extraction is equal to the discounted future net benefit of the last unit extracted today.
d. For nonrenewable resources, the efficient current extraction of the resource is defined by MNB0=MEC+MUC0.
e. When the expected future demand for a good increases, the current MUC increases.
Q3. With a discount rate of zero, does the standard model of a renewable resource like a fishery predict that the efficient sustained yield (ESY) stock level is at least as great as the maximum sustained yield (MSY) stock level?
Q4. Is it possible in some circumstances for the open access sustainable stock level (SOA) to be higher than the maximum sustained yield stock level, SMSY?
Q5. This question pertains to a graph that you have never seen before. It's a good question to test your conceptual understanding of the basic fisheries model.
Below are two "stock paths" showing fish stock over time, where initial stock at time 0 is the same in both cases. One path is the one that would be observed in an open access regime, the other one is the efficient path, i.e., the path that would be followed by a management regime that maximizes the present value of profits from the fishery.
(a) Label the two paths, "open access path" and "efficient path".
(b) How did you know which path was which?
(c) Show on the diagram SESY and SOA.
(d) Starting from the same initial stock level, is it possible for the efficient path to initially rise over time while the open access path falls over time? Explain in one sentence.
