1) Imagine that a national government reduces the marginal cost of fishing effort through a subsidy, such...
Question:
1) Imagine that a national government reduces the marginal cost of fishing effort through a subsidy, such as a fuel tax exemption. How would this subsidy affect the open-access equilibrium level of fishing effort? What would happen to the equilibrium stock of fish and average harvest? Would the net benefits of the fishery still be equal to zero in this case?
2) Suppose that the marginal cost of extracting oil is $40 per barrel and that this does not change over time or with the amount extracted. The current price of oil is $60 per barrel and the interest rate is 5%.
a) What is the current resource rent (or marginal user cost) for oil ?
b) Assuming Hotelling's rule holds true, provide an expression you could evaluate on a calculator for the resource rent (or marginal user cost) 20 years from now.
c) Assuming Hotelling's rule hold true, provide an expression you could evaluate on a calculator for the price of oil in 20 years.