Reference no: EM13876213

1. [Lecture 10-27 Discounting] Oil production has been proposed for an area along the coast off Southern California. Oil production would jeopardize the use of beaches along 10 miles of coast which are a major venue for surfing, bathing and other beach activities. The beach recreation runs to about 500,000 visitor days a year. Oil production would greatly reduce beach use, lowering it to about 100,000 visitor days. The oil production would last for 15 years. After that, the oilfield will have been depleted and oil production activities will cease. Once the oil production ends, beach visitation would partially recover, averaging about 350,000 visitor days per year. If there is no oil production, it is expected that beach recreation will continue at its present level indefinitely. Environmental economists studying beach recreation in Southern California have estimated that the value of an average trip to the beach in Southern California, in terms of the average consumer's surplus, is about $16 per visitor day. Oil production is expected to earn profits of $12 million per year for the 15 years of the oil production. In the following calculations use an interest rate of 5%.

(a) If oil production starts now, what is the present value of the profit from oil production?

(c) If oil production is delayed and starts in five years time instead of now, what is the present value as of now, of the profit from oil production?

(d) If there is no oil production, what is the present value of beach recreation in the area?

(e) If oil production starts now, describe the time profile of the beach recreation that will occur in the area. What is the present value of this recreation?

(f) If oil production is delayed and starts in five years time instead of now, describe the time profile of the beach recreation that will occur in the area. What is the present value of this recreation?

g) If oil production starts now, what is the present value of the combined sum of economic flows that will occur - the profits from oil production plus the value of recreation?

h) If oil production starts is delayed and starts in five years time instead of now, what is the present value of the combined sum of economic flows that will occur - the profits from oil production plus the value of recreation?

i) Given three policy options - oil production starts now, oil production starts in five years time, or no oil production ever - which is the best option from an economic perspective?