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AEM 2500 Fall 2010 HW5 f

# AEM 2500 Fall 2010 HW5 f - terms of increased crop...

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AEM 2500: Environmental and Resource Economics, Homework 5 – Market Failure (Commons Goods) Distributed Oct. 6, 2010. Due in Red Box outside Warren 102 by 9:00 a.m. Oct. 15, 2010 10 Points. All graphs should be clearly labeled and all other work legible. If we are unable to interpret your work, you will receive a lower score. 1. Adapted from Harris, Ch. 4 #1, p. 87. (note that the fishing example on pp. 76-77 in the text is very useful for this question). Farmers in an arid region in Mexico draw their irrigation water from an underground aquifer. The aquifer has a natural maximum recharge rate of 340 gallons per day (that is 340 gallons per day filter into the underground resource), which could be regarded as the maximum sustainable withdrawal. The total product schedule for well operations looks like this: Wells operating (N) 1 2 3 4 5 6 7 8 9 Total Water Output (Gal/Day) 100 200 280 340 380 400 400 380 340 a. The cost of operating each well is 55 pesos per day and the value to the farmer, in
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Unformatted text preview: terms of increased crop production and revenue, of each gallon of water is 1 peso. Calculate the total daily revenue (TR = output times value) for each number (N) of wells operating. b. If each well is privately owned by a different farmer, how many wells will operate? (To calculate this first calculate the average revenue, which is TR/N). Analyze this result in terms of economic efficiency and sustainability. c. What would be the economically efficient number of wells? (To calculate this you will need marginal revenue, which is given by ∆ TR/ ∆ N.) Show that net social benefit in the present period is maximized at this number of wells. d. How could the socially efficient equilibrium identified in part c be achieved through taxes? In this case is the socially efficient level also ecologically sustainable? e. How would the answers to b, c, and d change if costs fell to 38 dollars per well per day?...
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