Peter J. Wilcoxen
Department of Economics
University of Texas at Austin
Due Tuesday 2/20
The Bureau of Land Management is the US government agency in charge of administering federal lands that are not National Parks (run by the Dept. of Interior) or National Forests (run by the Dept. of Agriculture). Imagine you're working there and are given responsibility for deciding what to do in the following situation.
A lumber company would like to log a particular parcel of land. If it goes ahead, it will earn profits of $1000 this year and each of the following 10 years. After the 10th year, assume the forest is entirely gone and does not grow back (this would be true for a rain forest). Also, to keep the problem simple assume that it's not possible to stop logging once it has begun. In other words, you're going to make a once and for all decision whether or not to allow logging.
The standing forest also provides external benefits to the local community. An economist has estimated these benefits to be somewhere between $600 and $800 per year, but can't say precisely (typical!). You may assume that the local area receives these benefits as long as any of the forest is still standing (that is, if the forest is logged they don't lose any of the external benefits until year 11, when they lose them all). To make things worse, no one is sure whether the interest rate will be 4%, 5% or 6% in the future.
Set up an appropriate spreadsheet and use it to answer the following questions:
Key Concepts