 |  Principles of Microeconomics, 1st Canadian Edition Robert H. Frank,
Cornell University
Ben S. Bernanke,
Princeton University
Lars Osberg,
Dalhousie University
Melvin Cross,
Dalhousie University
Brian MacLean,
Laurentian University
The Economics of Public Policy
Graphing ExercisesExtending the Text Example 14.2 explores the relationship between the cost of supplying water from different sources and the appropriate price to be charged for the water. The authors argue that in order for the citizens of Red Bay to enjoy the largest possible economic surplus, they should each pay the cost of producing the last litre of water, in this case 4.0 cents/litre. |
| | 1. | Locate the demand for water at 4¢. The model indicates that people are willing to buy 4,000,000 litres per day at this price. Why should the people who get water from the 0.2¢ per litre source be charged 4.0¢?
See our suggested answer. |
| | 2. | If, on the other hand, the usage of water falls significantly to, let's say 2,000,000 litres per day, how much should the town of Red Bay charge for water?
See our suggested answer. |
| On Your Own: What about the fairness issue? Continuing with the water company. In the last example above the demand curve was such that at 4¢ per litre the people of Red Bay wished to consume 2,000,000 litres per day. The determination was that they should be charged 4¢ for the water, even though the water only cost 0.8¢ per litre for the last litre produced. This seems patently wrong and unfair. To begin your analysis, open a new window containing the interactive Marginal Cost and Demand model graph. |
| | 3. | Why would we not charge the 0.8¢ marginal cost?
See our suggested answer. |
| | 4. | Under what conditions would the 0.8¢ per litre price NOT result in a water shortage?
See our suggested answer. |
| Question to Think About... - How important is it that municipal planners, who are charged with providing services at zero economic profit, understand and are able to accurately forecast the demand for services such as sewage treatment and water provision?
- How does the provision of fire and police protection differ from the provision of water and sewer services?
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2003 McGraw-Hill Higher Education