# AEC 351 Oregon State University Applied Economics Questionnaire

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Oregon State University
Department of Applied Economics
AEC 351
Homework 5
A small urban water utility (??) and an adjacent agricultural water district (??) participate in a
water market. The marginal net benefit of water for the urban user is ???????? (???? ) = 1,000 ?
0.05???? , where ???? is measured in acre-feet of water per year and benefit of water use is
measured in dollars. The marginal net benefit of water use by the agricultural district is
???????? (???? ) = 500 ? 0.025???? , with ???? measured in acre-feet per year.
Note: In the questions that follow, acre feet of water need not be traded in whole
units (unlike the simplified illustration provided in lecture). Rents from water use
should be calculate similar to the two-period mine problem in homework 3, i.e. the
area under the corresponding marginal net benefit curve.
1. If there are 19,000 acre-feet of water available for the two users, if trading occurs, how
much water will each use after trading, and what will be the equilibrium price? Assume
users in this market act as price takers of the equilibrium price after trading. Draw one or
more relevant economic graphs to illustrate your findings.
2. Suppose that a severe drought reduces water available to the two users from 19,000 to
13,000 acre-feet per year. If the agricultural user initially has the rights to 7,000 acre-feet
and the urban user has the rights to the remaining available water, how much does each
user lose in terms of total rents?
3. Redo your analysis in Problem #2, only this time assume that the agricultural user initially
has the rights to 3,000 acre-feet while the urban user has the rights to remaining water.
4. Compare and interpret your findings from Problems #2 and #3 using complete sentences
and one or more relevant economic graphs.