xid-9686981_2 - Thursday, Nov 17 Numerical example:...

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Thursday, Nov 17 Numerical example: Suppose: Marginal extraction cost = MEC = $2 WTP = P = 8-.4Q Discount rate = 10% ('inverse' demand curve; price is dependent variable, indicates WTP) Total Q supply = 20 After a little constrained optimization (not necessary for the exam): Quantity in t 1 = 10.2 Quantity in t 2 = 9.8 Present value of marginal user cost = 1.91 Price in t 1 = MUC + MEC = $1.91 + $2 = $3.91 Price in t 2 = MUC *(1.10) + MEC = $2.10 + $2 = $4.10 note higher MUC (and price) in t 2 why is it higher? Because of increased MUC in second period. This problem assumes constant MEC over both periods; but MEC is likely to increase as well (increasing marginal cost of retrieval). Implication: Hotelling's rule - Over time, with efficient use of an exhaustible resource, change in equilibrium resource price will be equal to discount rate.
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If discount rate = 3%, price of resource can be expected to be 3% higher in second period. Does this proposition have empirical support? H otelling's rule: Over time, in a competitive market and efficient use of an exhaustible resource, rise in equilibrium resource price will be equal to discount rate. If discount rate = 3%, price of resource can be expected to be 3% higher in the second time period (t2) than in the first (t1). The research that resulted in this theory tried to answer questions early in the 20th century regarding incentives and resource use - would owners of resources 'use up' all, or almost all, of the resource now, leaving very little or none of the resource for future use? What are the incentives (if any) to conserve the resource? Hotelling rule produces an equilibrium condition: Marginal User Cost = scarcity rent in period 2 = (1 + r) MUC in period 1; Resource rent = MUC = present discounted value of net benefits. Q
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This note was uploaded on 04/05/2012 for the course ECP 3302 taught by Professor Staff during the Fall '11 term at Florida State College.

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xid-9686981_2 - Thursday, Nov 17 Numerical example:...

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