Miscellany

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 MBD-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
  owners propertynot 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 Natl Forest policy increases
  loggingtemporarily 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 PLRL/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 100/0.052,000

11
Back to original example of grapes Effect 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?
RentB600
/bushel
RentC0
RentA1000
Farm A gains 1000 Farm B gains 600 Farm C
break even Oaks (on BC) 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
0
U
A0
0
100
A
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. PAafails.
Price
Urban Supply (S-QA)
Supply
PUrb
P
PAg
DTotal
DUrb
DAg
QAg
Q
QUrb
Water