Question

200 CHAPTER TEN NATURAL RESOURCES, THE ENVIRONMENT, AND AGRICULTURE race and ter al building b. If building terraces costs $10 per acrean races are good for only 5 years, would be terraces be a good investment? 22. Two identical farmers are competing for was a river. Their marginal revenue from using and the marginal cost of pumping water are sented in the following figure. ng for water from using water b. If the government subsidizes pollution control by paying the firms $3 for each unit of abate- ment, by how much would each firm reduce its pollution? c. Suppose a transferable discharge permit pro- gram were used in which each firm is at first required to abate 10 units, but firms are al- lowed to trade so that one abates more than 10 if the other abates less. Would trading cake place? What would be the expected final allo- cation of pollution abatement responsibilities? 21. Farmer Jones's farm is in a hilly section of the state. Erosion has always been a problem, but in recent years it has caused a decline in his yields. Over the next 5 years, he expects that his profits per acre will fall as seen in the following table. He is considering putting in terraces, which would stop the erosion and hold profits at $10 per acre. If he doesn't pay for terracing, he will put the money in the bank and earn 5% interest per year. Marginal Revenue - MC Profits per Acre without Terracing Profits per Acre with Terracing 20 60 100 (Acre-Feet of Water) a. In wet years, there is 200 acre-feet of water in the river. If the upstream farmer takes as much as he wants and leaves the remainder for the downstream farmer, how much will each farmer use? Is this efficient? b. In dry years, there is 100 acre-feet of water in the river. If the upstream farmer takes as much as he wants and leaves the remainder for the downstream farmer, how much will each farmer use? Is this efficient? How much would the downstream farmer be willing to pay to the upstream framer for a marginal increase in the water released in dry years? WN a. What is the present value of profits per acre with and without terracing?

only answer question 21.

Answer 1

21.

A

R = 5%

PW of profit without terrace = PW of uniform annuity of benefit + PW of arithmetic gradient

PW of profit without terrace = 10*(P/A, 5%, 5) - 1*(P/G, 5%, 5)

PW of profit without terrace =10*4.3295 - 1*8.237

PW of profit without terrace = $35.06 per acre

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PW of profit with terrace = PW of uniform annuity of benefit

PW of profit with terrace = 10*(P/A, 5%, 5) = 10*4.3295

PW of profit with terrace = $43.3 per acre

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B.

PW of incremental benefit if terrace is implemented = 43.3 - 35.06 = $8.24 per acre

But, Cost of building terrace = $10 per acre

Since cost of building terrace is more than the benefits achieved, then terrace building would not be a good investment.