Posted: September 23rd, 2022

A small town is trying to decide whether to build

Fall 2022
Downside Set
Please submit by canvas (should you face any technical situation, electronic mail your resolution additionally to the graders)

1. A small town is trying to decide whether to build a brand new water filtration system for its public water
provide. There are two districts within the town and the willingness to pay for the system differs between the
two districts. The WTP curves are given by:
District 1: WTP1 = eight – .05Q
District 2: WTP2 = 12 – .2Q
the place Q is the p.c of water filtered by the system, a public good.
A) Based mostly on these WTP curves, decide the town’s marginal social profit (MSB) for this
public good. Present a graphical and algebraic reply. Bear in mind, that WTP can not go
beneath zero.
B) If the market provide for the system had been MC = 6 + zero.15 Q, what is the allocatively
environment friendly stage of the general public good to present? Present a graphical and algebraic reply.
C) Utilizing your graph from half B), clarify why the person districts won’t present the
allocatively environment friendly stage of water filtration.
2. The provision curve and demand curve for bottled water given by:
Provide: Q = -100 + 400P
Demand: Q= 1150 – 100P
A) Discover the aggressive equilibrium value and amount, PC and QC say.
B) Suppose that this water was drawn from an underground acquifer by the water bottling firm.
The manufacturing of this bottled water imposed an exterior price on different customers of the water provide. For
instance, farmers that drew water from the identical acquifer confronted greater prices to pump water for
irrigation. Suppose that the marginal exterior price (MC) imposed by the bottling firm was
MC = .001Q. Derive the allocatively environment friendly stage of bottled water when this price externality is current.
C) Calculate the change in welfare that may happen if the town might transfer from the aggressive
output stage to the allocatively environment friendly stage. That is, you’ve to calculate the world of the triangle
shaded in orange within the doc-cam lecture notes V, pages 7/eight. Additionally present your reply in a clearly
labeled graph.
D) Suppose now that the MC was fixed for every unit of output, not growing with Q, and
given by MC = .5. Recalculate your solutions to elements B and C utilizing this fixed MC curve.
E) Clarify how a Pigouvian tax on bottled water could possibly be used to obtain the allocatively
environment friendly output stage. Calculate the tax. (You could have to wait till Tuesday’s lecture on 9/13 to have the opportunity to
remedy this final half).

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