EC5218 Economic and Sustainable Resource Management Assignment Solution

Assignment Answer

• Referencing Styles: APA
• Words: 6500
• Course Code: EC5218
• Course Title: Economics and Sustainable Resource Management
• University: James Cook University
• Country: AU

 

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Q1: Explain in your own words how the Hoteling approach works, and give an example showing all your work. (40 marks)

Q2: If the price of a renewable resource unit is $40 now and $60 in 1 year and MEC = $20 both points in time. The financial interest rate is 15%pa, and population growth rate is 20%pa.

a). How much of the 500 units of the total resource should you extract now? (5 marks)

b). What does the population that is not extracted now grow to later (in 1 year)? (5 marks)

c). An ecologist suggests taking exploration trips only later (in 1 year) to find more renewable resources. Assume that the cost of each trip in 1 year (later) is $1,000 and that 25% of the time a trip discovers 200 units of new natural resources. How many exploration trips should occur? (5 marks)

d). Ignore Q2(c) when answering this question. The government introduces a tax now of $5 per unit of a renewable resource. What optimal extraction occurs given this policy, and why might this government policy be better than creating a tradable (in the market) right to extract (extraction permit)? (15 marks)

e). Why does the shadow cost increase with time? (10 marks)

 

Q3: Answer the following using the information in Q2 above – ignore questions 2(c), 2(d), 2(e).

 

a). If recycling commences when the price is above $50 per unit, how much recycling takes place (and when)? (10 marks)

b). The marginal extraction cost for recycling is assumed to be equal to the price above which recycling takes place. Why is this a safe assumption? (20 marks)

c). If recycling commences when the price is above $30 per unit, how much recycling takes place in total? (10 marks)

Q4: The median Townsville resident would pay $2 per month (every month) to save the Amazon rainforest. Assume there are 180,000 people in Townsville. Assume that a representative sample (of Townsville residents) has been interviewed. Assume the social discount rate is 0.1% per month. Assume that the cost of the associated project to save the Amazon rainforest is $400 million. Does the project create an economic loss (show all working)? (30 marks). Imagine that the project manager ignores the contingent valuation. What reasons might the project manager give for ignoring the contingent valuation? (10 marks)

Q5: Two farmers are considering the use of pesticide for the coming year’s crop. If they both use the pesticide, they will earn $1.5m each. If only one farmer uses the pesticide, they will earn $2m, with the other farmer (who does not use the pesticide) earning $1m. If neither farmer uses the pesticide, they will both earn $2.5m. Assume that currently, both farmers use pesticides.

a). What pesticide “fine” policy could you put in place to ensure neither farmer uses the pesticide? Remember, show your work. (15 marks)

b). Instead of using a fine/penalty policy, the government creates a tradable permit. If you buy the permit, you can use pesticides. Why might the government price the permit at the same price as the fine? (15 marks)

c). If there is not a pesticide “fine” policy and farmers don’t use pesticides in any year, how can this are explained? (10 marks)

Q6: The price of “fossil fuel” energy both now and in 1 year is $80 per unit and $120 per unit, respectively. Renewable energy is used only when the price of energy exceeds $100 per unit. The shadow cost of renewable energy now is $90,000. The shadow cost of renewable energy in 1 year is $300,000.

a). How much renewable energy in total is generated? (15 marks)

b). If the government wants to use a subsidy to incentivize 5,000 units of renewable energy extraction, when should the government apply the subsidy and what is the subsidy per unit amount? (15 marks)

c). What assumptions have we made in the above question about renewal energy and “fossil fuel” energy? (10 marks)

Q7: A pastoralist and an agriculturalist have 200 hectares and 500 hectares of land, respectively. The agriculturalist’s yield is $200 per hectare, and the Pastoralist’s yield is $300 per hectare. The Pastoralist allows his cattle to escape and eat 150 hectares of the agriculturalist’s crop. Using Coase’s concepts, explain in detail what the legal system ideally forces the Pastoralist to pay the agriculturalist? (30 marks) What price per hectare of land is paid by the Pastoralist for using the agricultural land, and why does this price per hectare of land disincentivize the Pastoralist from using agricultural land? (10 marks)

Q8: Answer the following, showing all working and diagrams.

 

a). How can government align the average biomass of a forest with the maximum profit of a firm that extracts the forest’s trees? (5 marks)

b). Describe in detail an example of how governments can use game theory to design fines to prevent the overuse of fertilizers on agricultural crops. (5 marks)

c). Describe in detail how Hotelling can be used to ensure the sustainability of a river system. (5 marks)

d). What are the similarities and differences between bequest value and existence value? (5 results)

e). What problem can arise with growth rate when used in the hoteling (extract now and extract later) approach? (5 marks)

f). Why does shadow cost an important concept? (5 marks)

g). Explain how water market trading can fail? (5 marks)

h). What is the problem of using the hoteling approach to ensure a sufficient level of biodiversity? (5 marks)

 

Q9: The population growth rate and financial rate of return for crayfish are 30%pa and 17%pa, respectively. The marginal user cost for crayfish now and later (in 1 year) are $20 per unit and $50 per unit, respectively. The total quantity of crayfish now is estimated to be 200,000 units.

Sustainability requires the total quantity of crayfish to be at least 150,000 units at any point in time.

The government is considering implementing a tax now and a subsidy later policy. The tax per unit and subsidy per unit are of the same magnitude (e.g., a tax now of $7/unit and a subsidy later of $7/unit). Explain in detail why this might be a good policy for the government?