Econ 308 Midterm
(Average Revenue) (Marginal Revenue)
1.) a.) # Of Operations | Total Harvest | Average Harvest | Marginal Harvest | Marginal Profit
0 0 0 0 0
1 40 40 40 15
2 75 37.5 35 10
3 105 35 30 5
4 130 32.5 25 0
5 150 30 20 -5
6 165 27.5 15 -10
7 175 25 10 -15
8 180 22.5 5 -20
9 182 20.22 3 -22
b.) To figure out the number of logging operations that maximizes the total profits in the ...view middle of the document...
Once it hits seven operations, nobody else will enter the industry because the average harvest equals the assumed $25,000 per week. All the operations up to six look at the average and assume profit will be made and the seventh operation looks to break even and eventually make profit. As long as their average revenue covers the cost of being in the industry, they will continue to harvest. This constant selfishness and disregard for the ‘social’ costs then leads to the overexploitation and deforestation. Furthermore, as loggers continue to harvest, they continue to receive private gains but also experience private loss. For example, as they harvest more of that one stretch of rainforest and gain more profit by selling the logs, the degraded resources hurt them later on so they must stay at a constant rate of harvesting to ensure at least breaking even down the line. This explains why the behavior of every logger is rational at the individual point of view rather than the aggregate level. In the end, the private gains outweigh everything else and they continue to harvest and cause deforestation.
d.) “Negative Externality: a cost of a transaction not borne by the buyer or seller.” (Goodstein, pg. 34) Some externalities associated with logging included the Loss of genetic material for medical or agricultural applications and Release of carbon dioxide stored in the “carbon sink” of the forest. With the total externalities valued at $10,000 per operation, this would then have to be added to the $25,000 per week one logging operation already has to pay. So with now $35,000 that one logging operation is liable for in one week, we must look at the marginal revenue again and find out where the marginal cost is covered and then profit is visible to find the efficient number of operators. “…Efficient outcome is one in which the net benefits produced by the economy are maximized.” (pg. 40) Since at two operations the marginal cost of $35,000 is equal to the marginal revenue and marginal harvest of 35,000 logs at the price of one dollar per log, two is the number of operators the industry allows for the continuation of harvesting without loss of profit. This ensures an efficient number of operations at two because as long as they break even, they will continue to harvest looking for profit to happen soon.
e.) The cost of operation would have to rise to eliminate profit beyond the efficient level, where the average harvest is 37.5. A tax of between 10 and 12.5 would raise costs sufficiently from discouraging the 3rd operator from entering. If referring to the non-externality case, and the efficient level is where the average harvest is 32.5, then there should be a tax of between 7.5 and 5.
f.) Individual rights, state ownership and communal management would all have an effect on the logging industry in the previous example. Individual rights would pose a problem to every single logger because since everyone would have there own rights and no one would...