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Miscellany

Miscellany. Shrimp and turtle excluding devices. Review of GATT restriction:

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Miscellany

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  1. Miscellany

  2. Shrimp and turtle excluding devices • Review of GATT restriction: • “Governments may impose regulations on imports comparable to those imposed on domestic goods regarding their physical characteristics and performance, but not regarding how products are produced, if those methods have no effect on product characteristics or performance” • “Shrimp-Turtle”: • Legal challenge to GATT restriction in which the US was permitted to embargo shrimp caught without sea-turtle excluding devices • Why did it succeed? • GATT allows for 2 exceptions: • Necessary to protect plant life or human or animal health • Conservation of exhaustible resources • Lawsuit argued that shrimp are largely in the global commons – on those grounds it succeeded.

  3. MB and MEC $/Q D MSC MPC MEC Q Net MB=D-MPC $/Q MEC Q* Q

  4. Some final exam hints • Exam is open everything • 3 hours allocated • Practice exam distributed Thursday • Same structure • 2/3 will be same topics • 1 extra credit challenge problem • Covers whole course - emphasis on later material

  5. Rent, Land, & Water, How is value determined for natural resources? Prices?

  6. Example: Grape Prices & Oaks • High grape prices in 2000 caused conversion of oak woodland to grape production. Why? • Who gains or loses from an increase or decrease in grape prices? • Winemakers? • Landowners? • Consumers? • What are the consequences for oaks of price change in grapes?

  7. Concepts of “rent” • Contract rent: payment by tenant for right to use owner’s property—not the concept of rent we use here • Apartment • Economic or scarcity rent: payment to a fixed factor above competitive rate of return (payment for a good in excess of its cost of provision), usually due to scarcity • Fertile agricultural land (costs nothing to provide) • Jennifer Aniston • Nobel Prize winning professors • Exhaustible resources • Quasi-rent: Short-run profits that are competed away over time. • New Nat’l Forest policy increases logging—temporarily benefits current loggers

  8. What determines the value of land? • Land values have two components • “Return” from productive activities (like growing grapes) -- rent • Speculative component – discounted value of expected use in the future • Eg, may expect demand for housing in 50 years • Take a closer look at rent and return

  9. Example: “Return” to Ag Land Have 1000 acres of land, best used for growing strawberries Price of Strawberries Demand Return to Land = RL Marg Cost Supply Bushels of Strawberries Return to land is rent – surplus accruing to factors in short supply

  10. What determines the price of ag land? • Assume no speculative component • Price of land: PL • Annual returns to land: RL • Interest rate on similar assets: i • Arbitrage condition: PL=RL/i • In other words • Typical returns to assets must equal income • land value is net present value of future returns • Example: an acre generates $100 of return • Assume 5% interest/discount rate • Land price = 100/0.05=$2,000

  11. Back to original example of grapesEffect of price change on oaks • 3 different farms (types of land)-A, B, C • 1000 acres of each type • With $1000 in inputs can produce • A: 500 bushels [cost = $2.00/bushel] • B: 400 bushels [cost = $2.50/bushel] • C: 250 bushels [cost = $4.00/bushel] • Current price $2.00/bushel

  12. Who gains from 2x price increase? RentB=600 $/bushel RentC=0 RentA=1000 Farm A: gains $1000 Farm B: gains $600 Farm C: break even Oaks (on B&C): lose 4.00 New Price 2.50 2.00 Old Price What is the rent at the old Price of $2 a bushel? Bushels 500 900 1150

  13. Observe: • All grapes sell at the same price • Better land fetches higher rents • Marginal land fetches little • Inframarginal lands garner “Ricardian Rents” • QUESTION: If price drops, what farmer goes out of business? Value of loss?

  14. Value of land for housing 1. Returns to land for housing (per year) $/acre Supply of land Demand for housing Price per Year Acres 2. Value of asset – one acre of land = Net Present Value of Stream of Returns from housing (May well increase over time.) OR Returns today plus discounted expected value tomorrow.

  15. Summary for land • Land is in limited supply, of different levels of quality and in different locations (some more convenient than others) • Land value consists of • NPV of stream of returns (eg, strawberries or housing services) • May contain speculative component due to future value

  16. The economics of water • Allocation: balance between many users and limited resource: • Consumptive uses (residential, industrial, agricultural) • Non-consumptive uses (fisheries, recreational, hydro-electric power, transportation) • Water prices • Typically depend on user • Typically average cost priced

  17. Consumptive users in US • Irrigation: 39% • Thermo-electric power: 39% • Public supply: 12% • Industry: 6% • Livestock: 1% • Home: 1% • Mining: 1% • Commercial: 1%

  18. Top 3 agricultural users

  19. Agricultural vs. municipal • Agricultural water heavily subsidized • Price ~ $20/AF, use 80% water in California • Marginal cost to supply ~ $1000/AF • Municipal water • Price ~ $300/AF • Groundwater • Largely unregulated, “open access” resource, few property rights, difficult to enforce pumping laws

  20. Inefficiencies in water supply & implications • Ex: Lake Cachuma and State Water --Rents go to inframarginal sources Marg Cost PB State Water Demand B PA Rent, Demand A Demand A Lake Cachuma Quantity of Water Price is associated with marginal source

  21. Average Cost Pricing – inefficient • Government agencies and regulated monopolists often required to price to yield zero profits • Price = (Total costs)/quantity • With Avg Cost Pricing, state water (too much consumption) • With efficient pricing, no state water Marg Cost State Water Average Costs Lake Cachuma Demand A Quantity of Water Too much water

  22. Examples • What happens when parking at UCSB is average cost priced? • Limited number of parking lot spaces • Extra spaces can only be provided with parking garages • Hint: Marginal costs are • Lots: $100/space/year • Parking Garages: $4000/space/year • What is efficient policy?

  23. The Central Valley Project • The CVP carries water from Northern CA to southern CA. Water rights for CVP water follow the land that gets the water, not the owner (ie, not severable). • Which landowners gain from CVP?

  24. Who gains from CVP? • Landowners that purchased property prior to CVP gain. • Prior purchase price of land did not “capitalize” the CVP water right. • Future price will capitalize that right. • Rent accrues to property that will obtain rights to CVP water.

  25. Imperial Valley/San Diego • High profile water transfer proposed from Imperial Valley to San Diego • Imperial Valley • Desert, agricultural, poorest county in CA • Vast water rights • San Diego • One of richest, largely municipal, high marginal value for water.

  26. The economics of water transfer • What does economics have to say about water transfer from agricultural uses to municipal uses? • Allocate a fixed amount of water between the 2 uses. • How do we know when allocation is efficient? • Equi-marginal principle

  27. Efficient allocation San Diego willing to pay this for 1st AF $ (A) $ (U) Imp. Valley willing to sell 1st AF for this $1000 DA $50 DU U0 100% U: 0% A0 A: 100% 0%

  28. Did they reach agreement? • Different marginal values should lead to large incentives for trade • Imperial Valley was going to sell about 5% of water allocation to San Diego at price of around $300/AF. • Deal broke down initially (2002) • Concerns over agricultural labor & way of life • Feds intervened by cutting back IV water • Deal struck in Fall, 2003

  29. California & the Colorado R. • 7 states draw from Colorado: • Arizona, Colorado, California, New Mexico, Utah, Wyoming, and Nevada • Dept. of Interior: CA has not lived up to sharing & conservation obligations • Saw Imperial Valley transfer as good thing • If no deal, slash CA entitlement from 5.2 MAF/yr to 4.4 MAF/yr. • Jan 1, entitlement reduced.

  30. Allocation by prior appropriation • Prior Appropriations: “First in time, first in use” • Economists criticize open access systems because they lack specified property rights. “Prior appropriations” gives property rights to agricultural users. Is this an efficient way to allocate water between 2 consumptive users?

  31. “Prior appropriations” Ag users get first dibs, consume QAg units of water at price PAa. Urban buys QUrb at price PUrb. PAa< PUrb so equi-marginal principle fails. Price Urban Supply (S-QA) Supply PUrb P* PAg DTotal DUrb DAg QAg Q* QUrb Water

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