Question

During a particularly dry summer, officials in Tucson, AZ worry that their existing water supplies are not large enough to meet residents’ basic needs and they begin to discuss measures for reducing the city’s water consumption. Residential water use consists broadly of “indoor” use (drinking, cooking, bathing, laundry, etc.) and “outdoor” use (watering grass, washing cars, filling up swimming pools, etc.). The city, being reluctant to raise water rates, wants to place a ban on outdoor water use because using water in this way seems less “essential.” As an economist, you wonder whether it might be better to increase water prices and allow residents to decide for themselves how to allocate water across different uses. To make a more formal case, you obtain data on Tucson’s water demand in each sector (indoor and outdoor) and decide to calculate the deadweight loss associated with this outdoor water ban.

You will find that demand for “indoor” water (?_??) and “outdoor” water (?_???) are given by

? = 150 − 3?_?? and ? = 20 − 0.2?_???

1. Compute the deadweight loss ($/day) associated with the ban on outdoor water use. (To find this number, you can use figure like the one shown below.)

2. What is the price ($/1,000 gal.) that Tucson should charge to bring the city’s total residential water consumption down to ?̅?

Answer 1