Question

Read the following excerpt and answer question 3. Money down the drain Households hit by sky high power bills have also been silently battling surging water and sewage costs in a double – whammy on their budgets A Herald Sun analysis of 10 years of bureau of Statistics data has found that water and sewerage charges jumped an average 91 per cent since 2007, not far behind electricity’s jump 116 per cent jump. …… Water economics specialist and Australian National University professor Quentin Grafton said the costs to “drought-proof” cities [by building higher cost desalination plants] had been passed on to customers over the past decade, and authorities had started charging households more for water use above certain thresholds. … Author Anthony Keane Source: The Herald Sun October 21st, 2017 3. Using the cost diagrams, including drawing a graph, explain, what is happening to costs of the firm. Identify any relevant information provided in the article. What solution would you recommend to the government to address any equity concerns where poorer households experiencing high water prices (noting that clean water is an important commodity)? Explain your solution carefully. Word count 350.

Answer 1

Cost of the firms are rising. It is leading to shift in MC upward. Since marginal benefit from water is constant. demand for water will decline at a higher marginal cost. It will motivate people to conserve water. It is a human tendency and his rationality that he is more concerned for cost he has to incur. moral lectures fail to do what a price rise can. When price of water is increased, people use it more carefully and objective of water conservation gets fulfilled. It is shown with the help of following diagram.

In the diagram given above, when Marginal cost was less, demand for water was OQ. With increase in marginal cost, MC shifted to MC₁ and demand for water decreased from OQ to OQ_0.

Government can maintain dual pricing to achieve its objective of equity. Higher prices can be charged from the rich and lower price or zero prices from the poor strata.. However zero pricing or free supply is also not recommended as any commodity given free si highly misused and overused.