Assignment 2: Coase Theorem For our purposes, assume we can define the Coase Theorem as “if property rights are well defined, and there are not significant transaction costs, an efficient allocation of resources will occur, even if externalities exist.” Page 57 in Harris begins a discussion of the Coase Theorem. A description and example applications are shown. Your assignment is to make up your own hypothetical scenario for the application of the Coase Theorem. Describe your scenario (in your own words) and create a distribution of benefits table under different rights. Your results should look something like Table 3.3 (page 59) in Harris. Submit your scenario description and be sure it includes your table. Up-load your paper as pdf or MSWord file. Include your name in the file name. For example “gsewellAssign2.pdf”. Assignment 3 Now that we have studied the common pool issue as illustrated by the fisheries example, lets apply our efforts to another natural resource. Aquifers can behave as common pool resources, even in states like Oklahoma where they are technically private property. As you might guess, Ronald Coase (and I) could attribute this to incompletely defined property rights (i.e. How much is mine). For our example we will use a discrete aquifer used for irrigation/agriculture. Assume that the electricity costs $10 a day to pump a well. We will simplify the agriculture part and just say that a gallon of water produces $0.003 worth of profits from the crops grown. If that seems low that is about what citizens in Ada pay for municipal water. In this example (see assignment spreadsheet) total water output (gal/day) would be analogues to the total catch per season. 1. I have plotted aquifer output (gal/day) for you. Define the zones of constant returns, diminishing returns, absolute diminishing returns. 2. Plot the total cost, water value and profits (per day) vs number of wells 3. Plot the marginal cost per well, marginal revenue per well, and average revenue per well vs number of wells. 4. Based on your findings: a. what # of wells yields the production maximum (total gallons) of the aquifer? b. What is the maximum number of wells that yields profits (open access equilibrium)? c. What number of wells yields maximum profits? d. Based on marginal cost and marginal revenue, what number of wells yield the efficient outcome? 5. What could you do to achieve an efficient outcome? Outline your plan. Assignment 3 Now that we have studied the common pool issue as illustrated by the fisheries example, lets apply our efforts to another natural resource. Aquifers can behave as common pool resources, even in states like Oklahoma where they are technically private property. As you might guess, Ronald Coase (and I) could attribute this to incompletely defined property rights (i.e. How much is mine). For our example we will use a discrete aquifer used for irrigation/agriculture. Assume that the electricity costs $10 a day to pump a well. We will simplify the agriculture part and just say that a gallon of water produces $0.003 worth of profits from the crops grown. If that seems low that is about what citizens in Ada pay for municipal water. In this example (see assignment spreadsheet) total water output (gal/day) would be analogues to the total catch per season. 1. I have plotted aquifer output (gal/day) for you. Define the zones of constant returns, diminishing returns, absolute diminishing returns. 2. Plot the total cost, water value and profits (per day) vs number of wells 3. Plot the marginal cost per well, marginal revenue per well, and average revenue per well vs number of wells. 4. Based on your findings: a. what # of wells yields the production maximum (total gallons) of the aquifer? b. What is the maximum number of wells that yields profits (open access equilibrium)? c. What number of wells yields maximum profits? d. Based on marginal cost and marginal revenue, what number of wells yield the efficient outcome? 5. What could you do to achieve an efficient outcome? Outline your plan. Assignment 3 Now that we have studied the common pool issue as illustrated by the fisheries example, lets apply our efforts to another natural resource. Aquifers can behave as common pool resources, even in states like Oklahoma where they are technically private property. As you might guess, Ronald Coase (and I) could attribute this to incompletely defined property rights (i.e. How much is mine). For our example we will use a discrete aquifer used for irrigation/agriculture. Assume that the electricity costs $10 a day to pump a well. We will simplify the agriculture part and just say that a gallon of water produces $0.003 worth of profits from the crops grown. If that seems low that is about what citizens in Ada pay for municipal water. In this example (see assignment spreadsheet) total water output (gal/day) would be analogues to the total catch per season. 1. I have plotted aquifer output (gal/day) for you. Define the zones of constant returns, diminishing returns, absolute diminishing returns. 2. Plot the total cost, water value and profits (per day) vs number of wells 3. Plot the marginal cost per well, marginal revenue per well, and average revenue per well vs number of wells. 4. Based on your findings: a. what # of wells yields the production maximum (total gallons) of the aquifer? b. What is the maximum number of wells that yields profits (open access equilibrium)? c. What number of wells yields maximum profits? d. Based on marginal cost and marginal revenue, what number of wells yield the efficient outcome? 5. What could you do to achieve an efficient outcome? Outline your plan. wells total Water output (gal) total cost in $/day if it costs $10/day/well water value ($) assuming $0.0030/gal Profit ($) Average reveue per well ($) cost per well ($) Profit per well ($) Marginal revenue per well ($) marginal Cost per well ($) 0 20 40 0 200,000 400,000 60 80 100 120 140 160 180 560,000 680,000 760,000 800,000 800,000 760,000 680,000 200 Total Ground Water Produed (gal) 900,000 800,000 700,000 600,000 500,000 total Water output (gal) 400,000 300,000 200,000 100,000 0 0 50 100 150 200 250 Number of Producing Wells Revenue, Cost and Profits 2 Value ($) 580,000 Aquifer Water output 1 1 0 0 50 100 150 200 Number of Wells total cost in $/day if it costs $10/day/well water value ($) assuming $0.0030/gal Profit ($) Marginal Conditions tal Water utput (gal) 1.2000 Value ($) 1.0000 0.8000 Average reveue per well ($) 0.6000 0.4000 Marginal revenue per well ($) 0.2000 marginal Cost per well ($) 0.0000 0 50 100 150 Number of Wells 250 Profit ($) 200 250 Assignment 3 Now that we have studied the common pool issue as illustrated by the fisheries example, lets apply our efforts to another natural resource. Aquifers can behave as common pool resources, even in states like Oklahoma where they are technically private property. As you might guess, Ronald Coase (and I) could attribute this to incompletely defined property rights (i.e. How much is mine). For our example we will use a discrete aquifer used for irrigation/agriculture. Assume that the electricity costs $10 a day to pump a well. We will simplify the agriculture part and just say that a gallon of water produces $0.003 worth of profits from the crops grown. If that seems low that is about what citizens in Ada pay for municipal water. In this example (see assignment spreadsheet) total water output (gal/day) would be analogues to the total catch per season. 1. I have plotted aquifer output (gal/day) for you. Define the zones of constant returns, diminishing returns, absolute diminishing returns. 2. Plot the total cost, water value and profits (per day) vs number of wells 3. Plot the marginal cost per well, marginal revenue per well, and average revenue per well vs number of wells. 4. Based on your findings: a. what # of wells yields the production maximum (total gallons) of the aquifer? b. What is the maximum number of wells that yields profits (open access equilibrium)? c. What number of wells yields maximum profits? d. Based on marginal cost and marginal revenue, what number of wells yield the efficient outcome? 5. What could you do to achieve an efficient outcome? Outline your plan. wells total Water output (gal) total cost in $/day if it costs $10/day/well water value ($) assuming $0.0030/gal Profit ($) Average reveue per well ($) cost per well ($) Profit per well ($) Marginal revenue per well ($) marginal Cost per well ($) 0 20 40 0 200,000 400,000 60 80 100 120 140 160 180 560,000 680,000 760,000 800,000 800,000 760,000 680,000 200 Total Ground Water Produed (gal) 900,000 800,000 700,000 600,000 500,000 total Water output (gal) 400,000 300,000 200,000 100,000 0 0 50 100 150 200 250 Number of Producing Wells Revenue, Cost and Profits 2 Value ($) 580,000 Aquifer Water output 1 1 0 0 50 100 150 200 Number of Wells total cost in $/day if it costs $10/day/well water value ($) assuming $0.0030/gal Profit ($) Marginal Conditions tal Water utput (gal) 1.2000 Value ($) 1.0000 0.8000 Average reveue per well ($) 0.6000 0.4000 Marginal revenue per well ($) 0.2000 marginal Cost per well ($) 0.0000 0 50 100 150 Number of Wells 250 Profit ($) 200 250
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