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(a)Describe the open-access equilibrium in terms of the number of households and net benefit.

01 / 10 / 2021 Statistics

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What is the dominant strategy for the game? Is this a Nash Equilibrium? 
(b)How might the strategies change if the game was repeated? 

2)A geothermal resource lies under Thermal City and it is possible for homes to access the resource for heating. Energy withdrawn for heating provides the following total benefits   where B is total benefit and z is the number of households. The marginal cost (and average cost) of operating a private well that taps into the resource is $10 per household.
(a)Describe the open-access equilibrium in terms of the number of households and net benefit. [5 marks]
(b)Describe the efficient number of households and the net benefit associated with the efficient number of households. Illustrate your results (in both (a) and (b)) using a suitably labelled diagram. [10 marks]
(c)Assume that Thermal City finally faces up to the problem caused by open-access and seeks your advice on implementing a system of tradable extraction rights. Starting from the open-access equilibrium:
i)Describe how a system of tradable extraction rights might be designed. Describe the outcome you would expect from adopting such a system? [5 marks]
ii)Recognising the path dependence, that is you are starting with a regime of open-access, associated with introducing tradable rights, what obstacles/challenges might arise during the transition to a rights-based regime? Discuss. [10 marks]
iii)    You are aware that the transition to tradable extraction rights has to be accomplished through a political mechanism. What additional advice can you offer that will facilitate what you have recommended as an efficient alternative to open-access? [10 marks]   



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