ĐỀ THI: Môn VI MÔ KINH TẾ NHẬP MÔN

Vietnam Forestry University
ECON 340 – Introduction to Natural Resource Economics
Problem set 3 - Assignment 3
1- A private logging company is being asked to avoid large clear-cut do that
the effectiveness of a forest control water-runoff is not impaired. List the
potential impacts (costs and benefits) of this practice and propose relevant
techniques that can be used for measuring those impacts.
Answer: In my point of view, there are some costs that we should care
in processing this scheme of clear cutting.
1. If selected cutting is applied it will require more money investment in
term of harvesting than clear-cutting because of smaller scale during a long
period of time.
2. Increase the cost of transfer the felling tree and getting them to the
market, hiring labor to stay and cutting the tree, maintaining machines in the
forest
3. Opportunity cost of doing other works instead of putting a long time in the
forest in comparison with a short-time harvesting in clear-cutting techniques.
4. Because there are many trees are still presented in the forest, so the
process of planting new forest rotation is more costly with many different
times rather than a one-time of replantation.
5. The opportunity cost of converting land into other land use purposes. With
smaller scale, the higher cost of operating is required.
6. Cost of management and take right to logging timber
On the other hand, there are many strong points of applying this
techniques not only bring social benefit that means environmental friendly,
but also economic benefit. That is:
1. The quality of timber is higher because of only the qualified trees are
harvested.
2. It can help to prevent soil erosion of the forest rather than clear-cutting
that will lead to no forest cover; then large soil are being eroded.
3. Forest degradation from suddenly cutting all the trees are the forest is no

longer an ideal habitat for many wildlife to live. So it may causes the loss of
many endangered species due to fragmentation or habitat lost.
4. Water quality also has close relationship with forest status. Because the
forest play a role to storage, filter and flooding control, it will secure local
people from many water supply related problems. It means that the local


people have enough time to replant the new trees, and response with the
change in water quality, and quantity either. There will be no suddenly
flooding and water regulation that happening when this technique is practice.
5. It also provides investor or forest owner a regular income in compared
with one-time harvesting.
6. Lower risk of losing money because of many reasons such as: felling in
the prices, trees are damaged because of natural disasters, or diseases.
7. Good for carbon sequestration that are important in mitigating global
climate change.
Techniques that we can use in measuring this value is:
-For measuring benefits:
+ Market price method.
+ Production function method.
+ Hedonic pricing method.
+ Travel cost method.
+ Damage cost avoided, Replacement cost, Substitute cost methods.
+ Contingent valuation method.
+ Choice experiments method.
+ Benefit transfer method.
-For the case of Physical Facilities in measuring costs:
+ Most of the relevant costs relate to the opportunity costs of the inputs
used.
-For the case of Public Regulation in measuring costs:

+ Costs estimation for this case is more difficult as it requires
information/data on both supply and demand function of the industries
affected by the regulations.
2- A proposal has been put forward to remove a dam on a river, which
currently produces hydroelectric power. What are the main types of the costs
in this case, and how might you go about measuring each type?
Answer:
A major part of the cost would be the costs of physically removing the dam.
This could be estimated with engineering cost techniques, analogous to
what is done in estimating the costs of constructing a new dam. Removing
dams is certainly not as common as building them, so there is less
experience among engineers to rely on, but the principal methods could be
reasonably straight forward. Another major cost will be the value of the lost
electricity that is no longer generated at the dam. Assuming this is a


marginal change in electricity supply (i.e. it does not lead to a change in the
price of electricity) the price can be taken as a measure of its value. If it is
assumed that the electricity is replaced with fossil-produced power, one may
want to add an allowance for the environmental costs of the replacement
electricity and this environmental cost can be measured using non-market
approaches such as PFES, evaluating for environment effectiveness…etc
External costs:
External cost: flood risks, hazards, fire protection, water supplies, moving
inhabitants who live near this area, improving the transportation system,
ensuring agricultural irrigation will be able to continue doing; not affect to
farmers’ major revenue resources or farmers’ life, moreover, cost of the
environmental changes
Measuring cost: there are two main types of cost that are going to measure:
Costs of physical facilities (capital cost, operating and maintenance costs,

engineering or scientific authority costs, and so on.) and costs of public
regulation (1. The extent to which the marginal cost/ supply function will be
shifted up by the regulation, (2) the extent of any output adjustments that
firms will make as a result of a cost changes.
Use the CBA techniques
But before applying CBA there are some things that should be prepared in
the proposals:
Proper resourcing
Getting the right skills
Collecting high quality information
Consulting with stakeholders
3- What types of questions might you put in a contingent valuation study to
estimate the benefits of limiting timber harvesting in certain areas so as to
preserve habitat for the endangered monkeys?
Answer:
- how much you WTP for monkeys management (wildlife) and
conservation?
- how much money you spend on entertainment each month?
- have you heard about any programs for monkeys conservation ?
- what is maximum and minimum of money you WTP for monkeys
conservation?
- what is your age?
- what is the best things you care about: cost efficient or other?


For limiting timber harvesting:
Which type of tree or plant species should and should not be
harvested?
Which suitable techniques should we use to limiting timber harvested:
selective cutting or small scale clear-cutting?

- How much expected profits do the firms lost if they apply the limiting
timber harvesting?
- How benefits the monkey will get from applying these techniques?
- Do we have better alternative choice instead of limiting cutting?
- How many trees does the firm are willing/ or give up to harvest in
contributing to monkey conservation that are not serious impact on their
business
- How much social benefit do we get when this proposed is implemented?
• For monkey’s preservation:
- What happen to the life of monkey when their habitat is lost by clearcutting in certain area?
- Which conservation program is suitable to apply in this case?
- Do we really need to lower or limiting cutting to conserve monkey?
- What is the cost of hiring labor for maintaining and operating program?
- How much does it cost to buy scientific authority program.
- How much money for building a monkey conservation center?
- Should we establish some preservative points to develop ecotourism?
4- How it is possible to reconcile the theoretical results we obtained
concerning increases in the price of nonrenewable resources with the
declines in actual prices that have occurred in the past and that are still going
on?
Answer: The primary “Hotelling” type results of the simple model, that
production is tilted toward the present, price is tilted toward the future, and
rent rises at the rate of interest, are based on the assumption that extraction
cost and demand functions are stable. Also see our notes:
Extraction Economics for a Known Stock—
p0 − MC0 =

1
( p1 − MC1 )
1+ r

The two-period example: Present value of net

benefits (PVNB) = Net benefits in year 0 + [1/(1+r)] (Net benefits in year 1)
Conclusion 4: price rises at the rate of discount r over time, or, price is tilted
toward the future—this is the famous “Hotelling Rule”. The assumption is
that extraction cost and demand functions are stable.


If, on the other hand, extraction costs are expected to decrease (so that
supply increases), and demand to increase (but increase in demand is smaller
than increase in supply), the time paths of quantity and price can be
reversed, as they have been in reality. Also see our notes: Reductions in
extraction costs (due to technological changes) have occurred faster that
demand increase, driving prices down.

5- Consider a three-period model of nonrenewable resource extraction. Lay
out the maximization problem in a way analogous to the two-period model
in the chapter, and determine the explicit expression for user cost.
Answer: The three-period model:
Present value of net benefits (PVNB) = Net benefits in year 0 + [1/(1+r)]
(Net benefits in year 1) + [1/(1+r)2] (Net benefits in year 2)
PVNB = B0 – C0 + [1/(1+r)](B1 – C1) + [1/(1+r)2](B2 – C2)
Solving for intertemporal efficiency means to find a serial of extraction
levels (q0*, q1*, and q2*) in different years which can maximize PVNB;
PVNB is a function of q0, q1, and q2 so we have:
d ( PVNB) =

∂ ( PVNB)
∂ ( PVNB)
∂ ( PVNB)

dq0 +
dq1 +
dq2 = 0
∂q0
∂q1
∂q2


d ( PVNB) =

+

∂[ B0 − C0 +

∂[ B0 − C0 +

1
1
( B1 − C1 ) +
( B2 − C2 )]
1+ r
(1 + r ) 2
dq0
∂q0

1
1
( B1 − C1 ) +
( B2 − C2 )]
1+ r

(1 + r ) 2
dq1
∂q1

1
1
( B1 − C1 ) +
( B2 − C2 )]
1+ r
(1 + r ) 2
+
dq2 = 0
∂q2
1
1
( p0 − MC 0 )dq0 +
( p1 − MC1 )dq1 +
( p2 − MC 2 )dq2 = 0
1+ r
(1 + r ) 2
∂[ B0 − C0 +

q0 + q1 + q2 = q, and q is a given number. Thus, q1 = q – q0 – q2, and dq1 = d(q
– q0 – q2); q2 = q – q0 – q1, and dq2 = d(q – q0– q1)
1
1
( p1 − MC1 )d (q − q0 − q2 ) +
( p2 − MC 2 )d (q − q0 − q1 ) = 0
1+ r
(1 + r ) 2

dq
d ( q − q0 − q 2 )
d (q − q0 − q1 )
1
1
( p0 − MC 0 ) 0 +
( p1 − MC1 )
+
( p2 − MC 2 )
=0
2
dq0 1 + r
dq0
(1 + r )
dq0
1
1
p0 − MC 0 +
( p1 − MC1 )( −1) +
( p2 − MC 2 )( −1) = 0
1+ r
(1 + r ) 2
1
1
p0 − MC0 =
( p1 − MC1 ) +
( p2 − MC 2 )
1+ r
(1 + r ) 2
1

1
( p1 − MC1 ) +
( p2 − MC 2 )
2
1
+
r
(
1
+
r
)
User cost =
( p0 − MC 0 )dq0 +

REFERENCES
1. Charles W. Merrill "Introduction" U.S. Bureau of Mines Bulletin 630, 1965, p. 2
2. U.S. Geological Survey "Mineral Commodity Summary", Appendix C, 2008, p. C1-C3
3. R. L. Erickson "Crustal Abundance of Elements, and Mineral Reserves and Resources",
"United States Mineral Resources" U.S. Geological Survey Professional Paper 820,
1973, pp. 21-25

4. Harold A. Taylor. "The Future of the Mineral Industry" University of Minnesota,
Minneapolis, Dept. of Mining Engineering, 1968, 15 p.

5. U.S. Securities and Exchange Comm. Form 10-K "Liquidmetal Technologies, Inc."
December 2008, p.3

6. F. M. Herzig and M. Hannington "Polymetallic Sulfides at the Modern Seafloor-A Review"
Ore Geology Reviews, Vol. 10 (Elsevier) 1995, pp. 95-115

7. [| />8. Platts Metals Week "Underseas Mining Finds Richer Grades at Lower Cost: Nautilus",
"Platts Metals Week", September 22, 2008, p. 14-15