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Problem Set 3 - ECON/FRE 374 Problem Set 3 Instructions a...

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1 ECON/FRE 374 – Problem Set 3 Instructions: a) Your grade on this problem set will be determined by randomly grading a single problem from the set below. It is thus important to do each question carefully. b) Problem sets are to be handed in at the beginning of class. Please do not upload your problem sets in webct. c) Any problem set received after the time it is due will not be graded. d) Please label and mark all graphs clearly, and finally, e) Your solutions to this problem set are due at the start of class on Friday, October 21, 2005. Questions (each question is potentially worth 10 points): Question 1 Suppose local governments in Brazil harvest heavily the Amazon forest. Their marginal net benefit is represented by MB = 900 - X, where is the number of harvested acres of forest. The world’s community is affected by this over-harvesting and has a marginal damage of MD = ½ X. (Using graphs would certainly help answering the questions.) In the absence of possible bargaining, a. what is the number of harvested acres? b. what are the total net benefits to local governments? Suppose it is possible to bargain and there is no enforceability problem. The United Nations offer a compensation to local governments for them to limit the harvested acres to the point where social surplus is maximised.
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