Be sure to clearly outline the rationale behind your answers (in other words, use sentences to explain your work), and to use diagrams as required.
1. Suppose the marginal social benefits curve for crude oil is MSB = 60 - 0.6Q and the marginal total cost curve is MTC = 20 + 1.4Q, where Q denotes the dynamically efficient quantity of barrels to be extracted from an Albertan oil field (in millions), on an annual basis.[1] Suppose that the current quantity extracted is 30 million barrels. Is this the dynamically efficient quantity? Explain.
Now suppose that the marginal current cost (MCC) of extraction is given by MCC = 20 + 0.4Q. Illustrate the MSB, MTC, and MCC on a graph. At the dynamically efficient quantity, what is the marginal resource rent (MRR) and the user cost (UC)? Are they the same as the MRR and UC at ? Explain.
2. Suppose the demand for gasoline is QD = 80 - 30PD and supply is QS = 30 + 10PS, where prices are expressed in dollars per gallon. How does a $0.50 per gallon tax affect the equilibrium price and quantity of gasoline? What is the elasticity of demand and supply? On the basis of your previous answer, do you expect producers or consumers to put up the most resistance to the tax? What about in the long-run? Explain.
3. Consider the market for uranium, an exhaustible resource. Suppose the market is initially in equilibrium, but that an unexpected decrease in demand occurs when consumers learn about a serious mine tailings chemical spill that makes global headlines. What will happen to the market in order to bring it back in equilibrium? Illustrate your answer with four graphs depicting the exhaustible resource equilibrium, similar to those in Figure 5.
[1] To simplify notation you may denote the MSB curve as the demand (D) curve and the MTC curve as the supply (S) curve, as long as you understand they denote socially efficient marginal values.