1. Provide a specific example of each of the following: (4 points)
1.a) An option value.
1.b) A bequest value.
1.c) A sympathy value.
1.d) Use value.
2. Annual animal losses in a national park amounted to an estimated 10,000 animals per year. Taxpayers were faced with the decision of whether to initiate a protection program which would cost $3.6 million today. A survey suggests that the monetary value per animal is $15 and the discount rate is 95%. (4 points)
2.a) Should the program be initiated? Show your calculations and explain.
2.b) If we do not know the value per animal today, what is that value that would make the taxpayers indifferent between initiating the protection program and not initiating it?
3.a) Provide a specific example of a situation in which command-and-control regulations are the most appropriate. Briefly explain why. (2 points)
3.b) Provide a specific example of a situation in which market-based policies are the most appropriate. Briefly explain why. (2 points)
4. A chemical company is contemplating dumping possibly poisonous material in the nearby river. If the chance of getting caught is 90% and if 1/2 of those apprehended are convicted and 1/2 of those convicted pay a $15,000 fine while the rest get a warning, what is the expected punishment cost of your action? (2 points)
5. Consider a fishery with annual growth as shown in the figure below. Explain what would happen if there were a continued annual catch (yield) of Y = CatchA with a beginning stock of each of the following (5 points):
6. Assume the coal resource is in fixed supply and its stock is 15 units of coal. Assume 2 periods of extraction: present and future and a discount rate of r = 10%. The demand function is given by MB = 10 – 0.5q and the supply function is given by a fixed MC cost of extraction MC = $5/unit of coal. (4 points)
6.a) What is the optimal extraction rate in a static setup of the problem? Show numerically. Why cannot it be applied to this resource?
6.b) What is the optimal extraction rate each period in a dynamic setup of the problem? Show numerically.
6.c) What are the prices and MUC-marginal user costs each period? Show numerically.
6.d) What are the total net benefits obtained if the extraction rate equals the dynamic efficient rate? Show numerically.
7. Given the assumptions of Hotelling’s rule and constant extraction costs (MEC), what is the total value (MUC) of a stock of 1 million “dry long ton units” of extractable iron ore if the current price is 40 cents per dry long ton unit and the marginal extraction cost (MEC) is 25 cents per dry long ton unit? Show numerically. (2 points)