Reference no: EM132061585

Environmental Economics & Management (4th ed.).

Assume that a small town uses a referendum to overcome the free-ridership problem and determine how its residents might value a new water filtration system for its public water supply. The voting results are aggregated by the town's two districts, yielding the following demand estimates:

District 1: Q = 160 - 20P1District 2: Q = 60 - 5P2, where Q is the expected percent of copper to be filtered by the system and Pis the price in millions of dollars.

1. Based on these estimates, determine the town's market demand for this public good, the new filtration system.
2. Because this is a public good, the two demands must first be written in inverse form and then summed. The reasoning is that, for a public good, each demander is expressing a willingness to pay for the same quantity. The inverse demand equations are:
3. P1 = 8 - 0.05Q P2 =12-0.2Q
4. Summing these yields the market demand, which is
5. P +P =(8+12)-(0.05Q+0.2Q)12
6. ⇒ P = 20 - 0.25Q . [Define, P ≡ P + P ]12