The California Water Pricing case Assignment.
The California Water Pricing case (available for purchase at https://hbsp.harvard.edu/import/757483) will require you to apply and discuss several issues involved in demand/supply analysis and market efficiency.
You may work in groups of up to (but no more than) 4. Each group submits a single paper. You may not discuss the case with members of other groups.
The paper should not be more than 5 pages (double-spaced, size 11 font or larger). Supporting graphs may be placed in an appendix that does not count towards the page limit. (See the last bullet.) You will not receive credit for anything on or beyond page 6. Clarity and conciseness are important for all types of professional writing, not just economics.
After reading the case, you should put together written answers (along with graphical support) to the following prompts/questions. Answer each question separately and be sure to number each answer (1, 2, 3, 4a, 4b, 4c, 5a, 5b). There is no need to make the answers to each question fit together like in an essay or memo. Instead, you can think of this like a problem set that focuses on an applied policy topic. That being said, you should revise and edit your responses to each question as you would an essay or memo (see the last bullet point).
1. [4 points] Summarize the current situation and problems associated with it. Be brief. One or two paragraphs are sufficient.
2. [4 points] How would implementation of a marginal cost pricing system for water impact total agricultural consumption and total urban consumption of water in California? Be brief. One paragraph is sufficient.
3. [8 points] How would implementation of a marginal cost pricing system for water affect the markets for agricultural crops? Be sure to discuss the effects on the market equilibrium, as well as the well-being of consumers and producers of these crops. Besides a clearly written answer and explanation, you should also support your written response with a supply/demand graph that show the effects of the policy in the market for a generic crop.
4. [10 points total] Which types of farmers (in terms of the types of crops they grow) would face the largest increases in production costs if California moved to a marginal pricing scheme for water? You should base your answer on the three issues listed below, and for the sake of simplicity, may focus on most- and least-affected crops for each of the three issues.
a. [3 points] How will the size of the increase in water costs differ for farmers of different crops? (Hint: See Exhibit 5.)
b. [3 points] How does the share of water used in production differ across crops? (Hint: See Exhibit 6.)
c. [4 points] How easy is it for farmers of various crop types to substitute away from water towards other inputs to production? (Hint: Exhibit 8 may prove useful towards addressing this issue. For instance, if water must be used in fixed proportion to other inputs, then by how much would you expect farmers in different regions, but all producing the same crop, to vary in terms of the intensity
of their water usage?)
You should address each of these three determinants of crop production cost increases separately. You
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have enough information to complete that quantitative task.
5. [6 points total] When production costs increase, producers would like to pass those additional costs to consumers in the form of higher prices. The price elasticity of demand determines the extent to which they can do so.
a. [4 points] For a given increase in marginal cost, discuss how the price elasticity of demand affects the amount by which prices increase. Besides a clearly written answer and explanation, you should also support your written response with two supply/demand graphs that show the price effects of the new water pricing policy in two different markets: a generic crop with relatively elastic demand; and a generic crop with relatively inelastic demand.
b. [2 points] Which types of consumers (in terms of the types of crops they consume) would face the largest increase in price if California moved to a marginal pricing scheme for water? For the sake of simplicity, you should ignore which crops have larger vs. smaller increases in marginal cost (you already addressed that question 4). For this question, you should focus on how differences in
demand elasticity affect how crop prices change. For further simplicity, you may focus on most- and least-affected crops. (Hint: Exhibit 9 may prove useful towards addressing this issue. The water policy in California affects the marginal cost of California-grown crops, not crops grown outside of California. Crops grown outside of California are relatively good substitutes for crops grown in
California. What does that imply about the price elasticity of demand for California-grown crops?)
[4 points] Most of your grade will depend on the quality of your answers to prompts/questions 1-5. An additional 4 points are devoted to the general quality of your writing. Be sure to edit and revise. Good writing is critical to conveying complex economic reasoning. (From the narrow perspective of your grade, incomplete sentences, incorrect grammar, misspellings, and other typos are particularly bad reasons to lose points.)
Include your supporting graphical analysis in an appendix to your written analysis. I was explicit about graphs that I expect you to provide for questions 3 and 5. However, you may wish to provide graphical support to the other prompts as well. The written analysis should reference these figure(s) when appropriate. The graphical analysis appendix does not count towards the page limit.
The California Water Pricing case Assignment.