TRENT UNIVERSITY Department of Economics ECON / ERST 3810H – FALL 2015 Assignment # 1

| November 24, 2016

Question
Assignment # 1
Instructions:
This assignment is due October 15th, 2015.
Late assignments will not be accepted unless prior notification is discussed with the
instructor and agreed upon.
You are allowed to work in groups of 2! Submit one assignment per group and clearly
state who worked on the assignment. Each person will receive the same mark.
You are allowed groups of 3, however the third person must be of the other discipline
(ie. 2 ECON and 1 ERS students). If you do not major in one of these 2 disciplines then
please ask!
This assignment is to be submitted through Blackboard (2 files – question # 1 being
separate from the rest of your answers).
Grading: The total number of marks is 45 and each questions’ worth is in parentheses. This
assignment is worth 15% of your final mark.
Question 1 [10]:
Complete Problem Set # 1 (regarding NPV and Gringoland Marine Park / Coral Mining exercise).
In each instance (ie. the different NPV discount rates), please be specific as to which project is
better.
Question 2 [7]:
The figure below shows the market for fertilizer. When fertilizer is applied to lawns, it runs off
into neighbouring streams and ponds, killing fish and creating an external cost.
a. What is the equilibrium price and quantity of fertilizer in an unregulated, competitive
market?
b. What is the efficient quantity of fertilizer?
c. Suppose government imposes a tax equal to the marginal external cost. What is the
equilibrium price paid by consumers and the equilibrium quantity after implementation
of the tax?
d. At the output level in part (c), how much is the tax?
e. How much tax revenue does government collect?
f. What is the deadweight loss borne by society if the externality is left uncorrected?

Question 3 [8]:
A rancher and a farmer are located next to each other. Here are the facts of their situation:
There is no fence between the ranch and the farm
The cattle enter the farmer’s fields and destroy $300 worth of corn each year.
The rancher’s business is worth $1000 annually (not taking into account any crop
damage).
The farmer’s business is worth $800 before the cattle trample the corn
It would cost the rancher $100 to build a fence that would keep the cattle on his
property.
It would cost the farmer $400 to build a fence that would keep the cattle out of her
property.
Assume that it costs the rancher and the farmer nothing to negotiate with each
other.
a. Suppose the rancher has to compensate the farmer for any crop damage. Will a
fence get built? If so, who will build it and who will pay for it? How much better off
do you think the farmer will be as the result of the fence? The rancher? Explain your
answer.
b. Suppose the farmer has to absorb (pay for) the crop damage herself. Will a fence get
built? If so, who will build it and who will pay for it? How much better off do you
think the farmer will as the result of the fence? The rancher? Explain your answer.

Question 4 [6]
The demand for trips across a river is Q = 1000 – 100P, where Q is the number of trips
per WORK day (assume 250 workdays per year). If the interest rate is 6% determine
which of the following options you would recommend to the government:
a) They can build a ferry for $350,000. It takes one year to build the ferry and it will run
for three years. They would charge a price of $2 per ride, which would just cover the
operating costs.
b) They can build a bridge for a cost of $20 million. The bridge would last forever and it
would be free.
Question 5 [8]:
Assume that we have fixed supply of 30 units of a depletable resource to allocate between two
periods. Assume first that demand is constant in the two periods; the marginal willingness to
pay is given by P = 9 – 0.3q . Also assume that marginal cost is constant at $0 per unit and
discount
rate is 10%.
a) What would be the dynamically efficient allocation?
b) Re-answer the question from part a) by using 30% discount interest rate. Compare
your answers.
c) Due to population growth, demand is higher in the second period. Thus the marginal
willingness to pay is given by P =12 -0.3q in later period. What would be the dynamically
efficient allocation? (Use 10% discount rate). Compare your answer to the one from part
a).
d) In addition to part c) also marginal cost is higher in the second period than in the first,
due to the reserve depletions. The new marginal cost is given by MC = q.
What would be the dynamically efficient allocation in this case? Compare your answer
with the one from part c).
Question 6 [6]
a) What are marketable permits?
b) Suppose there are two firms in an area, each emitting tons of sulphur. The government
decides on a target level of 200 tons of sulphur, and gives each firm a permit to emit 100
tons of sulphur. Suppose Firm A is very efficient and can reduce pollution by 100 tons
with an abatement cost of $500. Firm B has an older plant, so it will cost Firm B $1,000
to reduce emissions by 100 tons. What will occur with marketable permits?

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