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EC318 Final: EC318 Final Questions

7 Pages

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Nafeez Fatima

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Sample Questions: (Water, Land and Forests) 1. What type of resource is water? • Water is a stock-flow services that is rapidly renewed by the service of hydrologic cycle. Surface water is a renewable resource consisting of rivers, lakes and reservoirs. Groundwater is water that collects underground in aquifers. Some aquifers are non-recharging and are thus nonrenewable resources. - Additionally, recharging aquifers that are being drawn down faster than they are being recharged are also considered depletable. - If withdraw exceed the natural rate of recharge, ground water is a non-renewable resource. 2. How can surface water be allocated efficiently? - strike a balance among a host of a competing users - Supply an acceptable means of handing the year-to-year variability in water flow. - water price rise until P = MUC 3. How can ground water be allocated efficiently ? - If marginal net benefit not equal, it is always possible to increase net benefit by transferring water from low MNB user to high MNB user. - MNB equal across users is considered efficient. 4. Discuss the allocation system for Water. - Riparian Rights: right to use water to owner of the land adjacent to the water - Prior appropriation doctrine: allow the transfer of water away from stream for beneficial use. Water rights are determined by priority of beneficial use. This means that the first person to use water for a beneficial use or purpose can acquire individual rights to the water. - Usufructuary right: right to use water, not to own. 5. Water utilities have a variety of options to chose from when charging their customers for water. Discuss the four common pricing structures used and their advantages and disadvantages. - Uniform rate structure: the cost per unit of consumption does not increase or decrease with additional unit of consumption. - Declining block rate structure: the cost per unit decreases with additional units of consumption. - Inverted block rate structure: the cost per unit of consumption increases with additional units of consumption. - Seasonal rate structure: The cost unit of consumption changes with time periods. The peak season is the most expensive time period. 6. Suppose that an even age stand of trees is to be harvested and a single rotation is considered. (i). Explain the economic intuition for the condition that determine the year the trees are cut. 1 - age that the net present value from harvesting is at its maximum. Also when MAI is at its maximum. (ii). Define the net present value of the harvested timber as a function of the age of the stand and maximize the function with respect to age. -t - Max NPV = (1+r) {V(t) [P - C n]} - Cp - Max NPV = e {V(t) [P - C n]} – Cp (iii). What is the efficiency criteria for the solution of this problem. Explain. • A common foresters rule is to harvest when MAI is at its maximum. • It mean when the rate of return from let the stand grow over the late increment by age equal to the market return rate, it’s the efficient optimal age for harvest, as long as (P-Ch)>0. 7. What is a "public purpose"? Explain the frustration of public purpose problem. What is the main legal doctrine to solve this problem? - Public purpose is the government provide certain public services to meet the social demand. - Frustration of public purpose is government can legally acquire property for “public purpose” as long as the landowner is paid by “just compensation”, but this conversion of land ownership can be inefficient. - The legal doctrine involved in this problem is the “Eminent Domain”. -pubic infrastructure problems: subsides provided for public transportation & development costs. - market power: - frustration public purpose - Eminent Domain principle/ doctrine • The “Frustration of Public Purpose” problem – Eminent domain is the doctrine under which government can legally acquire property for a “public purpose” by condemnation as long as the landowner is paid “just compensation.” • The transfer is mandatory. • The compensation is determined by a legal determination. 8. How does total forested area tend to change with population density? - Big population has more incentives to deforest and convert the forestry land to agricultural use. -developing country while the property rights of forests are not clear defined, the “first come first serve” principle would lead the landowners feel insecure, since they hold no title of the land and can’t transfer it. So they would lack incentives to converse it, and have perverse incentives for overexploitation. Most populous areas are usually in those developing countries, the governments there are also have incentive to overexploit the resources in forest in order to raise the foreign exchange rate to finance their debts. 9. What are some of the positive externalities associated with forests? 2 - Positive externalities that standing forest can provide such as wildlife habitats, and the ecosystem functions. Removal of air pollution, regulation of atmospheric quality, nutrient cycling, soil creation, habitats for humans and wildlife, watershed maintenance, aesthetic and other amenity functions. 10. Why is the interest rate important in determining whether a private owner will clear cut timber or practice sustainable forestry? • Any positive discount rate will shorten the optimal rotation length. • Thus, higher discount rates yield shorter optimal harvesting times. • As long as the discount rate is positive, the trees should be harvested as soon as the growth rate slows to a point at which more can be earned elsewhere (than in the tree asset). 11. What is a mean annual increment? • MAI = Mean Annual Increment, Average growth of wood per year = MAI = V(t)/t 12. Is cutting timber at the maximum mean annual increment economically optimal? No. The Optimal age to harvest a standing tree is when MAI is maximum. This is considered a point of biological maturity. A rule that takes into account the economics of the stand would harvest the stand when the net present value from harvesting is at a maximum. 13. How is the economically optimal forestry management determined? • A rule that takes into account the economics of the stand would harvest the stand when the net present value from harvesting is at a maximum. 14. What are some the reasons why forests tend to be exploited? – At the national level, large debts in many developing countries encourage the overexploitation of resources in order to raise foreign exchange to finance the debt. – forests can serve the forest products like timber, fuelwood, food, water for drinking and irrigation, stocks of genetic resources. – People may need to convert forestry land into agricultural use. – The positive externalities that standing forests can provide can seem as the external cost of harvest, but from private perspective, individual would fail to realize this external cost/social level efficient demand. 3 15. There are two problems associated with land use which are receiving lot of attention in recent years. Identify these two problems and discuss possible solutions. Sprawl and Leapfrogging • Sprawl occurs when land uses in a particular area are inefficiently dispersed, rather than efficiently concentrated. • Leapfrogging refers to a situation in which new development continues not on the very edge of the current development, but further out. • The Pubic Infrastructure Problem: Inefficiently low transportation costs that have not been internalized can create inefficient favors over more distant locations, such as low marginal cost of driving and free parking. Incompatible Land Uses • The existence of interdependence between the neighboring lands. Negative externalities are common in land transactions. • Zoning is a traditional remedy for the problem of incompatible land uses. – Zoning involves land use restrictions enacted via an ordinance by local g
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