Question

The township has conducted a survey of its 100 residents to determine their willingness to pay for investments to improve groundwater quality. It was found that all residents have identical preferences. The marginal willingness to pay for water quality by each individual is estimated to be: MWTP = 25 - 5Q, where MWTP stands for marginal willingness to pay in dollars and Q is a measure of water quality. The marginal cost of water quality is estimated to be MC = 750Q, where MC is in dollars.

a) What is the equation for the aggregate MWTP for water quality for Cremona?

b) What is the efficient quality of water quality? Briefly explain why is this considered the efficient quantity?

c) Currently Q =0. What is the total benefit to households of moving from Q=0 to the efficient level of water quality? Describe your calculations.

d) What is the total cost of supplying the efficient level of water quality? Describe your calculations.

e) What is the net economic surplus from supplying the efficient level of water quality?

f) What is the efficient price that should be charged to each of the 100 rural residents for each unit of improved water quality? Briefly explain your logic.

Answer 1

a) Aggregate equaltion for MWTP

Marginal Willingness to Pay of each individual= 25-5Q, Q is the Water Quality.

Hence Aggregate Marginal Willingness to Pay = Marginal Willingness to Pay of 100 individuals.

= 100(25-5Q)

= 2500-500Q.

Hence the equation for Aggregate Marginal Willingness to Pay is 2500-500Q

b) Efficient Quality of Water.

Marginal willingness to pay should be equal to the marginal cost.

Hence, 25-5Q0

25 5Q

Q 5

Hence the efficient quality of water is less than or equal to 5

The efficient water quality doesnt let the MTWP become less than negative. If the MWTP becomes less than negative, the MWTP will be less than MC. This will not be benificial for the consumers. Hence the efficient quality is Q5

PART C)

MWTP/MB = 25- 5Q

At Q= 0, MTWP/MB = 25

Hence,as Q approaches 5, MTWP at 100

=100(25-5Q)

=0

Hence the total benifit becomes zero, as Q reaches 5, the efficent quality.

PART D)

MC= 750Q

Hence cost of 100 individuals at Q=5

100(750)*5= 375000

hence total cost at efficient level of water quality is 375000