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Now that we have studied the common pool issue as illustrated by the fisheries example, lets apply our efforts to another natural resource.Aquifers can behave as common pool resources, even in states like Oklahoma where they are technically private property. As you might guess, Ronald Coase (and I) could attribute this to incompletely defined property rights (i.e. How much is mine).For our example we will use a discrete aquifer used for irrigation/agriculture. Assume that the electricity costs $10 a day to pump a well. We will simplify the agriculture part and just say that a gallon of water produces $0.003 worth of profits from the crops grown. If that seems low that is about what citizens in Ada pay for municipal water. In this example (see assignment spreadsheet) total water output (gal/day) would be analogues to the total catch per season. I have plotted aquifer output (gal/day) for you. Define the zones of constant returns, diminishing returns, absolute diminishing returns.Plot the total cost, water value and profits (per day) vs number of wellsPlot the marginal cost per well, marginal revenue per well, and average revenue per well vs number of wells.Based on your findings: what # of wells yields the production maximum (total gallons) of the aquifer? What is the maximum number of wells that yields profits (open access equilibrium)? What number of wells yields maximum profits? Based on marginal cost and marginal revenue, what number of wells yield the efficient outcome?What could you do to achieve an efficient outcome? Outline your plan.
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