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ECON4410
Environmental and Resource Economics

Lab Assignment 2: NMV – HPM and Economics of fishery

This assignment is on hedonic price modelling and fishery’s economics. In your answer to each question, provide relevant reasoning (economic) for what you are doing and why you do so. The marks allocated to each question (and sub-questions) are given in parenthesis. Logical interpretation of answers carries higher proportion of marks. Also, note that when you use diagrams to show any results, always label the axes properly with relevant units.

Submission instructions: Please submit the assignment report before the due date through Turnitin in LMS using the submission link. While marking the assignment we would like to see what you have done in one word (or pdf) document, so copy the relevant columns from excel and paste them appropriately in the word file. You must use assignment cover sheet. Remember to sign the assignment cover sheet and also put your name and student ID in the document as well, not only in the cover sheet, unless you submit the cover sheet and the answer sheet as a single document. IF you use EXCEL to find solutions, submit the excel file as well using a separate link provided.

Hedonics lab question 1 (30%)

There has been a new park created in a suburb, and we need to know whether the money spent generated more benefits than it cost.

A study has been conducted using a hedonic price method which has identified how the price of houses in the area have been affected by the change.  The estimate is the change in house prices will not occur until year 10, when the park has become mature.

The key information is:

Timeline of costs:

year	costs ($m)
1	0.5
2	1
3	1
4	0.7

Number of houses in area affected: 200

Median price of houses affected in area, before the intervention: $500,000

Estimated increase in price as a result of the intervention: 7%

Year in which the increase in price occurs: year 10.

Part a (10%)

In excel, conduct a cost benefit analysis of whether it was worth providing the park.  In undertaking the analysis report the benefit cost ratio at 3 different interest rates: 5%, 10% and 15%.

Part b (8%)

Estimate the breakeven increase in house price, at interest rates of 5%, 10% and 15%.

Part c (12%)

A subsequent hedonic price study has suggested that the estimate of the increase in house prices reported above is not completely accurate.  It suggests that in year 10, when the park is mature, the house prices will be 7% higher than before the park created, but also that there will be a 3% increase in house prices in years 5-9, once the construction has finished.  

Note that both of these changes in house prices are relative to the initial price: they are not cumulative.

Re-estimate the benefit cost ratio at the 3 interest rates used above.

Reporting

Write a simple report of what you have found in the word document, clearly setting out what you have done, and the answers to Parts a-c.  You should also submit an excel file that shows how you have structured the analysis to get these results.  The excel file should have separate sheets for Part a/b, and Part c.

Hedonics lab question 2 (30%)

A researcher has undertaken a hedonic price study on the effect of air quality and distance to the nearest local park.

There are two files that are relevant for this study:

econ4410hp.csv, which contains the data, and

econ4410lab2hp.R , which is the R script file that reproduces the 3 models we want to consider.

The only difference between the models is the functional form used.

What you need to do is: run the script fie to produce the results from the three different models.

Generate the implicit prices for each of the variables in the model, for each of the three models, by adding appropriate commands to the R script file.

Write up your results in the word document, which should include:

A statement of the formulae that you used for the different functional forms that are appropriate to estimate the implicit price of the dependent variables, in each model.

Summarise the implicit prices in a table, so you can compare what the implications are of choosing different functional forms to model this relationship.

Variables in the data file:

p price of the house $’000

lp ln(p)

area area of block (m^2)

larea ln(area)

beds number of beds in house

baths number of bathrooms in house

carparks number of parking spaces for house

singles whether the house is single story: coded 0 for no, 1 for yes

distpark distance to nearest park, m

airq air quality index, from 0-10, with higher values being better quality

lairq ln(airq)

Write a brief summary of what you have found from this exercise, both in terms of the relationships between the variables and price, and the implications of using different functional forms.

Reporting

Write up your brief summary and table in the Word document.  Also cut and paste the R script file that you used to generate your results, and include that as an appendix in your word document.  If this script is run it should replicate all of the results you report.

Question 3 Economics of a fishery (40%)

Suppose a marine fishery is described by the variables and model parameters given in table below.

Table 1. Model description and parameters of a fishery

Biological parameters/variables	value
g = intrinsic growth rate of the stock (proportionate measure)	0.15
G = G(S) = new growth (tonnes)
S = fish stock biomass (tonnes)
SMAX = environmental carrying capacity (tonnes)	1
Fisheries parameters/variables
H = harvest yield (tonnes)
E = fishing effort (numbers of vessels)
d = response parameter (additional vessels per unit of marginal profit)	0.35
e = efficiency parameter (i.e. catch coefficient, harvest tonnes per vessel stock = tonnes per vessel per unit of stock)	0.0075
Economic variables
P = gross price of fish (£ per tonne)	150
p = net price of fish (£ per tonne) [p=P-c, where c is marginal cost per unit of fish caught]
w = cost per unit of effort (£ per vessel)	0.7
J = vessel profitability (£ per vessel)
R = revenue (£)
C = costs (£)
NB = net economic benefit = profit (£)
i = interest rate
t = time subscript

Now consider the following scenarios in the fishery and answer the associated questions.

Part a (10%)

First, assume that the fishery operates in an open-access condition. Find the equilibrium stock, harvest and effort for a steady-state open-access fishery using relevant expressions (formulae we discussed in the lab) for an open-access equilibrium.

Second, now consider that the fishery operates under a private property regime (private property fishery). For the same model parameters, find the equilibrium stock, harvest, and effort for a steady state private property fishery using relevant expressions for a private property equilibrium.

Comment on the levels of stock, harvest, and effort under steady state open-access and private property fisheries.

Reporting: Write a commentary on the solutions you obtained on all three aspects (S, H and E) for both open-access and private property fisheries in your answers. Provide relevant figures to complement your comments.

Part b (10%)

Consider a dynamic case of private property fishery where stock at time t+1 depends on stock at time t, natural growth of stock at time t to t+1, and the harvest at time t.  The effort at time t+1 depends on earlier effort at time t and a constant proportion of the normalised profit of effort at time t. Assume that both the stock and effort at time 0 are 1.

Find the equilibrium solutions for stock, harvest, and effort in the case of dynamic private property fishery. How long would it take for stock and effort to stabilise? Explain the dynamic behaviour on stock and effort in the fishery and show them using properly labelled diagrams.

Reporting: Write a commentary on the solutions you obtained for the dynamic PP fishery (S, H and E). Explain the dynamic behaviour of S and E and show them using diagrams.

Part c (20%)

Examine what happens to the steady-state equilibrium solutions (stock, harvest and effort) in both open-access and private property fisheries for the following changes in model parameters.

Each parameter has TWO values, i.e. you are evaluating two scenarios for each parameter compared to the base case (Table 1). Consider changing only one model parameter at a time, i.e., for changes in price you have two scenarios (i.e., less than and greater than the base case). Tabulate the results and explain the implications on equilibrium solutions (S, H, E) due to such changes in parameter values with economic reasoning.

Model parameter	Two values for model parameters
P	i) 100 and ii) 200
w	i) 0.5 and ii) 0.9
e	i) 0.0065 and ii) 0.0085
g	i) 0.10 and ii) 0.20
d	i) 0.25 and ii) 0.45

Reporting: Write a commentary on the solutions you obtained with a focus on effect of a change in parameter on fishery’s outcomes (S, E and H). You can provide the results in a tabular form and explain the implications of comparative static analysis of change in one parameter value at a time on fishery’s outcomes.