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Problem Set Students II

1. The document provides 5 practice problems related to environmental and resource economics. The problems cover topics like net present value calculations, external costs of production, optimal joint investment in a fountain, and classifying different resource categories as public goods, common-pool resources, or neither. 2. One problem asks students to determine the socially optimal quantity of a fountain given the marginal benefits of two neighbors and a constant marginal cost of production, finding the size that maximizes total benefit. 3. Another problem asks students to identify whether examples like highways, herd immunity from vaccines, and water sources are public goods, common-pool resources, or neither, explaining their reasoning.

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Lynn Shiyayo
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44 views

Problem Set Students II

1. The document provides 5 practice problems related to environmental and resource economics. The problems cover topics like net present value calculations, external costs of production, optimal joint investment in a fountain, and classifying different resource categories as public goods, common-pool resources, or neither. 2. One problem asks students to determine the socially optimal quantity of a fountain given the marginal benefits of two neighbors and a constant marginal cost of production, finding the size that maximizes total benefit. 3. Another problem asks students to identify whether examples like highways, herd immunity from vaccines, and water sources are public goods, common-pool resources, or neither, explaining their reasoning.

Uploaded by

Lynn Shiyayo
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Practice problems: Environmental and Resource Economics, 2021

The following problems are intended hone your thinking on some of the topics covered in the class. The
answers will be covered in the tutorial. You are encouraged to work on the problems beforehand, but you
do not need to turn in your answers.
1. Suppose a company is interested in undertaking an investment that incurs an immediate cost (when t=0)
of 10 Euros and no benefits. In the second year (t=2), the company incurs a cost of 2 Euros and benefits
worth 13 Euros. Assuming a discount rate of 4%, what is the net present value (NPV) of the project?
Would it be wise to invest in the project (yes or no)?

2. Gasoline brings great benefit to those who buy it, but burning it also creates external costs. Consider the
graph below, which shows the demand for gasoline, the private marginal cost of producing gasoline, and
the social marginal cost of producing gasoline.

a. Suppose that buyers and producers of gasoline do not consider the external marginal costs they impose
on others. Determine the equilibrium quantity and price; then add up the letters in the diagram to fill in the
appropriate spaces in the first column of the table below:
b. Suppose that conscientious sellers, out of the sheer goodness of their hearts, decide to incorporate
external marginal costs into their production decisions. Determine the new quantity (Hint: Use the social
marginal cost curve) and price, then use the letters in the diagram to fill in the appropriate spaces in the
second column of the table. (Be sure to remember that producer surplus is the area above private marginal
cost and below the price, out to the relevant quantity.)
Answer space for a and b:
External marginal cost not External marginal cost
considered considered
Consumer surplus
Producer surplus
External damage
Total net value to society
c. Producers rarely do something out of the goodness of their hearts, and are likely to consider only their
private marginal costs. Compare total surplus in both cases to determine the deadweight loss of the
externality when external marginal costs are not considered.

3. Jasmine and Casey are neighbours in a rural area. They are considering the joint installation of a large
fountain near their joint property line so that each can enjoy its beauty and also improve the value of their
property. Jasmine’s marginal benefit from the fountain is MBJ = 70 – Q, where Q measures the diameter
of the fountain (in feet). Casey’s marginal benefit from the fountain can be represented as MBC = 40 –
2Q. Assume that the marginal cost (MC) of producing the fountain is constant and equal to $80 per foot
(in diameter).
a. Find an equation to represent the total marginal benefit of the fountain.
b. What is the socially optimal size of the fountain?
c. Show that if either Jasmine or Casey had to build a fountain by themselves at a MC of $80,
neither would find even the smallest fountain worth building.
d. What is the socially optimal size of the fountain if the MC is $30?

4. Identify whether each of the following resource categories is a public good, a common-pool resource, or
neither and defend your answer:
a. The German Autobahn (highway) system for private motorists, which is financed through
general tax revenue and tolls on trucks.
b. The US highway system for private motorists, which is financed through general tax revenue
and tolls on trucks as well as private motorists.
c. Herd immunity achieved when 80% of the populace is vaccinated.
d. Water from a town well that excludes non-residents.
e. Bottled water

5. Suppose the state is deciding how much many miles of a very scenic river it should preserve. There are
100 people in the community, each of whom has an identical inverse demand function given by:
P = 10 – 2Q,
where Q is the number of miles preserved and P is the per-mile price a person is willing to pay for Q miles
of preserved river.
If the marginal cost of preservation is $400 per mile, how many miles would be preserved in an efficient
allocation?
How large is the economic surplus?

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