Extraction of a resource takes place in just two periods, current and future. Current-period marginal costs and marginal benefits behave according to MCC(q) = 15 + q0 and MCB(q)=65−q0. Future net benefits are impacted by current-period consumption, so user costs rise as more is consumed in the current period. Let user costs be represented by UC(q) = 3q0
(a) Sketch a graph of Marginal Benefit, Marginal Current Cost, and Marginal Total Cost as defined in class. If you want to be somewhat fancy and ensure that you don’t make mistakes, you can plug your functions into a spreadsheet and plot them. If not please make sure
(b) Find the optimal level of current resource extraction, q0
(c) If decision-makers ignore all future effects, how much will be extracted in the current period? What would be the efficiency loss from this?