March 30, 2017

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Suppose the City of Klamath is considering plans to build a dam on the Klamath River. There are currently social benefits to the recreational fishermen who use the river to catch salmon. The dam would be source of revenue, as it would create hydroelectric power that the government could sell; however, it would prevent salmon from swimming upstream, essentially ending any recreational fishing in the area. The president of the Klamath Board of Economic Development hires you to calculate the net benefits associated with the River’s use as a recreational fishery versus the revenue the city could earn from the dam. He gives you the following information on the marginal costs and marginal benefits associated with different numbers of fishermen on the river in a year.

Marginal Benefits of fishing the River Marginal Costs of fishing the River

MB Q (fishermen) MC Q (fishermen)
0 3000 90 3000
15 2500 75 2500
30 2000 60 2000
45 1500 45 1500
60 1000 30 1000
75 500 15 500
90 0 0 0

1. Calculate the fee the government should charge the fisherman for access to the river in order to maximize net benefits in a given year.
2. Using the price you calculated in Question 1, calculate the net benefits to society derived from the river in a given year.
3. Assume that the net benefits you just calculated (in Question 2) will continue from year 0 through year 10. Also assume that the dam would cost $250,000 in year 0 and then have annual maintenance costs of $30,000 in year 1 through year 10, while it would create $140,000 in benefits starting in year 1 and continuing through year 10. Calculate the Present Value of Net Benefits for leaving the river untouched and for constructing the dam over the period from year 0 to year 10 with a 4% discount rate and an 8% discount rate.
4. Explain why the project with higher discounted net benefits changes when we use a different discount rate?

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