Reference no: EM133636537

Assignment: Water Resource Economics

A vigorous debate rages over which of two potential urban water supply programs is an economically better way to supply safe affordable drinking water to residents of a large poor city. The high points of each program are:

I. Program I: Supply a minority of the population with cheap piped-in water by delivering 10,000 acre feet per year of utility supplied water from a central delivery system, at a price equal to the average cost of supply, $300/ac-ft. The remainder of water must be bought from street vendors described, for example at a price of $900 / ac-ft.

II. Program II: Supply the entire population by meeting all demands at a constant price. This program would build and use a shiny new engineered central delivery system that supplies water at a constant price equal to the average cost of supply. That price is $600 / per acre foot, charged to all buyers, for which total use is 70,000 ac-ft.

Your task is to compare Total Annual Economic Benefits (TAEB = CS + TR - TC) of each program by ranking the economic performance of each from the view of the city's water buyers/suppliers. You can use these abbreviations:

CS = consumer surplus = willingness to pay minus actual payments calculated for each program
TR = total revenue = price x quantity calculated for each program
TC = total cost = average cost x quantity calculated for each program

I will show you more about these terms in our class slides this week, letting you see a down-sloping water demand function for which the maximum price of water (y intercept) is $1650 per ac-ft.

Question A. Calculate the Total Annual Economic Benefits (TAEB) to the city's water stakeholders for each program and show calculations.

Question B. You have been hired as an expert consultant, and will snag a juicy consulting fee if you recommend the right choice. Describe your recommended choice and explain why you would make it.