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Upcoming in Class

Upcoming in Class. Homework #5 Due Monday Homework #6 Due Oct. 22 Extra Credit Writing Assignment Oct. 17th Writing Assignment Due Oct. 24th. HW #5. Suppose a market demand schedule for a resource is P = 200 - 4Q and the market supply schedule is P = 80 + 2Q.

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Upcoming in Class

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  1. Upcoming in Class Homework #5 Due Monday Homework #6 Due Oct. 22 Extra Credit Writing Assignment Oct. 17th Writing Assignment Due Oct. 24th

  2. HW #5 • Suppose a market demand schedule for a resource is P = 200 - 4Q and the market supply schedule is P = 80 + 2Q. • What is the equation for the marginal net benefit curve? • Disregarding future time periods, how much of the resource would be produced? • What is the marginal net benefit at this level of production?

  3. HW #5 • What is Hotelling’s rule?

  4. HW #5 • In your own words, explain why they claim “the fate of the world depends on the discount rate”.

  5. HW #5 • What types of materials were collected at the Household Hazardous Waste Collection Drive? • Why can these types of materials NOT go in landfills? • What was the cost for this one-day event, and how much material was collected? • Suppose the EAC did not collect Hazardous Waste, how much would a private company have to charge per ton to collect the waste?

  6. The Dynamically Efficient Allocation

  7. Change in discount rate A higher discount rate will favor the present. The amount allocated to the second period falls as the discount rate rises.

  8. Chapter 5 - A Two-Period Model • Assumptions • Fixed supply of oil • Consider two time periods only • Total supply is 20 tons • Demand (marginal WTP) is constant:

  9. Chapter 5 - Problems • Assume the demand conditions are the same, but let the discounted rate be 0.05 and the marginal cost of extraction be $2. Total supply available = 20. How much would be produced in each period in an efficient allocation? • Assume the discount rate is 0.1. What happens to the efficient allocation? • Assume the discount rate is 0.2. What happens to the efficient allocation?

  10. Discount Rate and Marginal User Cost • Marginal user cost rises over time at the rate of discount causing efficient prices to rise over time and thus reflecting scarcity.

  11. The Efficient Market Allocation of a Depletable Resource: The Constant-Marginal-Cost Case. (a) Period 1 (b) Period 2

  12. Marginal User Cost • The opportunity cost caused by intertemporal scarcity is called the marginal user cost (MUC). • The marginal user cost for each period in an efficient market is the difference between the price and the marginal extraction cost.

  13. Scarcity • Scarcity rent is producer surplus that exists in the long run due to fixed supply or increasing costs

  14. Chapter 5 - Problem • Assume the demand conditions are the same, but let the discounted rate be 0 and the marginal cost of extraction be $4. Total supply available = 20. How much would be produced in each period in an efficient allocation? • What would be the marginal user cost in each period? • Would the static and dynamic efficiency criteria yield the same answers for this problem? Why?

  15. Chapter 5 - Problem • Assume the demand conditions are the same, but let the discounted rate be 0.1 and the marginal cost of extraction be $4. Total supply available = 10. How much would be produced in each period in an efficient allocation? • What would be the marginal user cost in each period? • Would the static and dynamic efficiency criteria yield the same answers for this problem? Why?

  16. Efficient Intertemporal Allocations • The Two-Period Model Revisited • Dynamic efficiency is the primary criterion when allocating resources over time. • An n-period model presented uses the same numerical example as before, but extends the time horizon and increases the recoverable supply from 20 to 40, and a Marginal Cost of $2, and r=.10.

  17. FIGURE (a) Constant Marginal Extraction Cost with No Substitute Resource: Quantity Profile. (b) Constant Marginal Extraction Cost with No Substitute Resource: Marginal Cost Profile

  18. Upcoming in Class Homework #5 Due Monday Homework #6 Due Oct. 22 Extra Credit Writing Assignment Oct. 17th Writing Assignment Due Oct. 24th

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