Economics Weekly assignment #2

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Graphs can be neatly hand written, or in a word document form.

The City of Pleasantville has only 3 citizens: Mr. Miyagi, Mr. T, and Mrs. Butterworth. The City Council is thinking of creating a new park in Pleasantville for the citizens to enjoy. They recently sent a survey to each of the local residents asking them how much they would be willing to pay for each acre of this proposed park. The results of the survey are shown below as marginal values (so Mr. Miyagi would be willing to pay $18 for a 100 acre park and then $16 for the next 100 acres so $34 for 200 acres altogether).

• (3 points) Parks are generally considered public goods. Why would that be the case? Why does it matter that we define a park as a public good rather than a private good? Compare and contrast “willingness to pay” and price.

• (3 points) Given the results of the survey above, derive the market demand schedule for the Pleasantville Park. What would be the total benefit associated with having a 300 acre park? For what acreage are the marginal benefits the highest and for what acreage are marginal benefits the lowest? Does this make economic sense? Which size acre of park likely has the highest environmental impact? Why might these two goals (economic efficiency and environmental efficiency) be at odds?

• (3 points) Let’s suppose that a one-time fee is imposed on citizens in the amount of $50/citizen to fund a 500 acre park. Is this an efficient policy? Use words like Pareto optimal and efficient in your response.

• (3 points) The City Council does not think that the WTP estimates above incorporate time sufficiently (afterall once the park is created, it will last forever if maintained properly). The council determines that for a 500 acre park, the citizens will benefit by about $164/year starting in year 1 (as per the results of the survey) while costs will be high in year 0 at $500 but in subsequent years will only amount to a nominal maintenance cost of $5/year. At an interest rate of 5%, how long must this park be around before the net benefits are positive? Please show all calculations for full credit.

• (3 points) After talking with economists, the council realized that they have not fully incorporated opportunity cost into their decision making. If the park were not put on this 500 acres, they could lease the acreage to a timber company for a fee earning the town of Pleasantville $120/year into perpetuity. Which project should they choose if they are maximizing the net present value of net benefits for both projects into perpetuity? What is the difference in the value gotten from forestry compared to the park? Show all work for full credit.