2. An underground aquifer in a developing country is available to all farms in a small community.

Assume that it costs 50 pesos per day to operate a pump that can extract groundwater from the aquifer. e value that a farm can obtain by using or selling the water depends on how many farms extract water, as given in the table below.

a. Assuming that there is no regulation of the aquifer, how many farms will extract groundwater? Assume that as long as ea farm is making a profit, there is an incentive for more farms to extract water. Fill in the last column of the table to help you answer this question.

b. Is this unregulated outcome economically efficient? Explain.

c. What would be the economically efficient level of groundwater extraction (number of farms extracting water)? Hint: calculate total profit by multiplying number of farms by profit per farm and see where total profit reaes a maximum. At this point, the extra profit made by adding one more farm is just balanced by the losses to other farms.

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Number of households extracting water Revenue per day per household (pesos) Profit per day per household (pesos) Total profit (pesos) 1 100 2 100 3 100 4 90 5 80 6 65 7 55 8 40 9 20