Redwood National Park in northern California contains the tallest known redwood tree, as well as a remnant of the coastal redwood ecotype that once dominated coastal California. It does not receive many visitors: It has been estimated that no more than 5,000 visitors go each year, each spending an average of 3 days, for a total of 15,000 recreation visitor-days (RVDs) per year. When Redwood National Park was acquired by the federal government from private timber companies (who intended to manage it for redwood lumber), it cost approximately $600 million. That $600 million can be viewed as the present value of an annual stream of future costs.
(a) What is the annual cost of Redwood National Park if the interest rate is 10%?
(b) What is the opportunity cost of the establishment of the park, in terms of use of the land?
(c) Why is it useful to calculate the annual cost of the park in this example?
(d) What would the benefits per RVD have to be if recreational use were the only justification for Redwood National Park, and if the net present value of the park were to be nonnegative? If recreation were the only justification for the park, do you think that purchasing the park was efficient?
(e) What other justifications might exist for establishing Redwood National Park?
(f) There are approximately 100 million households in the United States. How high would average annual household willingness to pay for Redwood National Park have to be to justify it?