We can modify the inter-period allocation model to deal with the issue of interg

Question

We can modify the inter-period allocation model to deal with the issue of intergenerational allocation of resources. Suppose a generation is thirty-five years, and we are concerned with only two generations. Demand and supply functions for oil in the present generation are given by: Demand: Qd = 200 – 5P or P = 40 – 0.2Qd Supply: Qs = 5P or P = 0.2Qs

Draw a demand and supply graph showing the equilibrium price and quantity consumed in this generation in the absence of any consideration of the future. Now draw a graph showing the marginal net benefits from consumption in this period at all levels of consumption up to the equilibrium level. Express the net benefit (benefit minus cost) algebraically.

Suppose that the net benefit function is expected to be the same for the next generation. But there is a discount rate (interest rate) of 4 percent per annum, which for thirty-five years works out to (1.04)35, which is approximately equal to 4. Total oil supply for both generations is limited to 100 units. Calculate the efficient allocation of resources between the two generations and show this graphically.

What is marginal user cost for this efficient allocation? If you include this user cost in your original supply and demand graph, what is the new equilibrium? If the demand curve is the same in the second generation, what will the price and quantity consumed in that period be? How would the answers differ if we used a zero discount rate? What can you conclude from this example about the general problem of allocation of resources over long periods?

Explanation / Answer

Talking about Inter period allocation; perspective regarding natural resources,sustainibility & equity ia kept into viewpoint.As per the above quest. we see that Hotelling Rule & Time Discountig i followed to some extent. The limits of our economic model & also address the interrelationship b/w social values & more specific market values,that we deal with the Economic theory. Our Simple two period example makes it clear that the discount rate is a critical variable.At the different rate of Zero rates, the optimal allocation ;start with a discount rate of Zero.At any discount rate above zero,we favour present consumption and future consumption to some degree.This logic can be extended from one period to many other period known as Hotelling Rules (prices minus the extraction costs.) must rise at a rate equall to the rate of the interest. the expectation of the future prices increases with exactly follow on exponential curve.

Kindly refer to:

http://www.ase.tufts.edu/gdae/pubs/te/ENRE/Ch5_Resources_over_Time.pdf(When marginal net benefit is just equal to zero, total net benefit is maximized )

Hartwick,J.M.,1977,"Intergenerational equity and the investing of the rents from Exhaustible Resources", American Economic review,66(1977);972-974

Hotelling ,Harold.1931,"The economics of teh exhaustible resources" Journal of the political Economy,39(2);137-75

Howarth ,Richard B. and Richard B. Norguard,1995."Intergenerational choices under the global Environmental change "In Handbook of Environmental Economics ,ed Daniel W.Bromley,Cambridge,MA : Oxfored, Basil Blackwear.

SOLOW,r.m.,1986,"On the Intertemporal Allocation of Natural Resources, Scandinavian ,Journal of Economis88(1986);141-149

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