BC's land base is 95 million hectares and forests cover 62% (55 million hectares) of the province. BC is Canada's most ecologically diverse province, with temperate rainforests, dry pine forests, alpine meadows, and more. But only 24% (22 million hectares) of these forests is available for harvesting. Of that amount, only 200,000 hectares - or less than 1% - are harvested on an annual basis.
Suppose the demand curve for raw materials from the forests is Qd = 50 - 0.5P, where Q is the units of raw materials produced from the forests and P is the price of raw materials in dollars. The marginal cost of supply is $40 (Here we ignore any externalities). Please complete questions of Part I and II.
Part I.
Now we assume that this two curves represent the marginal current benefits (MB=MCB) and the marginal current costs (MC=MCC) respectively. Also assume that the user costs equal UC=2Q (note that the user costs are positive).
(a). Calculate the socially efficient level of quantity of raw materials produced inter- temporally. Please use a graph to illustrate it.
(b). If the current quantity of output equals 25, please find the inter-temporal marginal net benefit from an increase in current output at this point.
Part II.
Now we assume another situation: if 39 units of raw materials are to be allocated between two years (Note: we still have MB=MCB and MC=MCC, but we do not know UC in this case).
(c). How much would be distributed to the first year and the second year respectively, if a dynamic efficiency is achieved? Given the interest rate is 0.10.
(d). What is the socially efficient price in the two years?
(e). What is the UC in each year?