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UBC ECON 374 – Land and Resource Economics

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UBC ECON 374 – Land and Resource Economics

FRE/ECON 374: Land and Resource EconomicsProblem Set 2Due: September 30, 2016 at 5pm via Connect only!Instructions:1. Please attach only 1 PDF or Word file (including all graphs/figures, if applicable).If you attach more than one, only the first file will be graded.2. Please answer all 4 questions. Maximum score for this assignment is 100 points.3. Any problem sets delivered after the due date or delivered in any other way than Connectwill receive a ZERO grade.4. Please, make sure that all graphs and figures are clearly labeled (if applicable).5. If you have any questions or require clarifications, please email TA, Rui Chen, [email protected] 1 (35 points)Spectra Energy is one of North America’s leading pipeline and midstream companies. Based inHouston, Texas, the company’s operations in the U.S. and Canada include approximately 21,000miles of natural gas and crude oil pipelines; approximately 300 billion cubic feet of natural gasstorage; 4.8 million barrels of crude oil storage; as well as natural gas gathering, processing, andlocal distribution operations. Spectra Energy has served North American customers andcommunities for more than a century.There is also a Spectra Energy company located in Vancouver, BC. Suppose there are threekinds of consumers needing services from this company in the society. The demands for theconsumers are as follows:Type 1 Consumer: P1 = 60 – 2Q1Type 2 Consumer: P2 = 60 – Q2Type 3 Consumer: P3 = 75 – (0.5)Q3Where Q measures the units (in millions) of energy products provided and P is the price ofenergy products in dollars (a private good). The marginal private cost when the companyproduces Q is MPC = 2Q + 15. Please complete questions of Part I and II.Part I.(Please show detailed calculations that helped you find answers for the followingquestions and also illustrate your answers graphically. Label your graphs!)(a). Derive the aggregate demand in the society consisting of the above consumers.Include all intermediate steps to deriving the equation. (8 points)(b). What is the market equilibrium quantity for Spectra Energy products? What is theprice for energy products sold? (8 points)Part II.In 2016, Spectra Energy in Vancouver, BC becomes the province’s biggest single emitter ofmajor air pollutants, according to a Vancouver Sun analysis of Environment Canada’s annualnational pollutant release inventory.Let’s assume the company emits one unit of air pollutants for each unit of energy products itproduces. We know the marginal external cost is: MEC=1.5Q+20, which is in dollars per unit ofair pollutants. Q represents units of pollutants are emitted.(c). What output level and price maximizes net social benefits? Show this numerically andgraphically. (Note: you can show the marginal social costs using the graph frompart I. Make sure that you clearly labeled it. Or, you can use a new graph). (8 points)(d). If the government tries to reduce the air pollution and would like to collect the emissionfee (tax) from Spectra Energy, what level of tax would you recommend to thegovernment? Also, calculate the revenue from this emission fee (tax). (6 points)(e). Find the deadweight loss to the society from energy products produced without theemission tax. (Hint: Use your graph of the socially optimal and market outcomes as aguide to calculate the deadweight loss). (5 points)QUESTION 2 (30 points)BC’s land base is 95 million hectares and forests cover 62% (55 million hectares) of theprovince. BC is Canada’s most ecologically diverse province, with temperate rainforests, drypine forests, alpine meadows, and more. But only 24% (22 million hectares) of these forests isavailable for harvesting. Of that amount, only 200,000 hectares – or less than 1% – are harvestedon an annual basis.Suppose the demand curve for raw materials from the forests is Qd = 50 – 0.5P, where Q is theunits of raw materials produced from the forests and P is the price of raw materials in dollars.The marginal cost of supply is $40 (Here we ignore any externalities). Please completequestions of Part I and II.Part I.Now we assume that this two curves represent the marginal current benefits (MB=MCB) and themarginal current costs (MC=MCC) respectively. Also assume that the user costs equal UC=2Q(note that the user costs are positive).(a). Calculate the socially efficient level of quantity of raw materials produced intertemporally. Please use a graph to illustrate it. (6 points)(b). If the current quantity of output equals 25, please find the inter-temporal marginal netbenefit from an increase in current output at this point. (4 points)Part II.Now we assume another situation: if 39 units of raw materials are to be allocated between twoyears (Note: we still have MB=MCB and MC=MCC, but we do not know UC in this case).(c). How much would be distributed to the first year and the second year respectively, if adynamic efficiency is achieved? Given the interest rate is 0.10. (10 points)(d). What is the socially efficient price in the two years? (5 points)(e). What is the UC in each year? (5 points)QUESTION 3 (20 points)Dungeness crabs are the most important species of crab harvested in BC province and areexploited by commercial, native and sport fishers coast wide. Dungeness crabs occupy theeastern Pacific Ocean and range from the Aleutian Islands to Mexico, from the intertidal zone todepths of 180 m. The inception of the commercial fishery occurred before the turn of the centurywith first recorded landings in 1885. The sport fishery has an equally long history and aboriginalharvests of Dungeness crab precede the discovery of North America by Europeans. During themost popular crabbing season, lots of fishers show up around rivers. As the number of fishersincrease, fewer crabs are caught per fisher. Suppose the crab price is $1/lb and consider thefollowing information:Numberof fishersAveragecatch (lb)Total catch($)1234567894004004004003803503002502004008001200160019002100210020001800AggregateMarginalRevenue($)4004004004003002000-100-200Cost perfisher ($)Total cost($)Net benefitsper fisher2502502502502502502502502502505007501000125015001750200022501503004506006506003500-450Using available data, as presented above, please answer following questions:(a). Draw a graph illustrating the marginal revenue, the average revenue, the marginalcost,and the average cost by defining revenue and cost is on the y-axis and the number offishers on the x-axis. Then, indicate the socially optimal and open access number offishers. (8 points)(b). If you run the government crab fisheries board, how many fishers would you allow tomaximize total profits from the river? Why? (4 points)(c). Calculate the resource rent at the socially optimal and open access number of fishers.(8 points)QUESTION 4 (15 points)Deer populations have increased across most of North America, in some places reaching levelsof abundance surpassing those that existed when the first European settlers arrived. However,that is not what hunters are seeing these days near Grand Forks, in southeastern BC, Canada,where a regional population collapse of mule deer and white-tailed deer appears to have takenplace.Suppose the average revenue product (ARP) of hunting deer in southeastern BC is22 – 2Q, where Q is the number of hunted deer. The ARP is downward sloping because thegreater the amount of hunting effort, the smaller the deer’s population size in southeastern BC.The individual cost for each deer hunter is $6. According to this information,(a). Calculate the average revenue product (ARP), the total revenue product (TRP), theaverage cost (AC), the total cost (TC), the marginal cost (MC), the profit, theexternalcost (EC), and the marginal social cost (MSC), and fill these values in the tablebelow:(6 points)QuantityofARPTRPMRPACTCMCProfitECMSChunteddragons12345678910(b). Draw a graph illustrating ARP, MRP, MC, and AC, and then indicate the sociallyoptimal and open access numbers of hunted deer. (6 points)(c). If there is open access for hunting deer, and there are 7 deer hunters already in, wouldyou hunt for deer in southeastern BC? (3 points)

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