1. Consider 3 households that share a lake used for recreational purposes. The water quality of the lake has been contaminated by an industrial plant that has since ceased its operations. At present, the lake contains 30 ppm of the contaminant. It is possible to clean the lake to 25, 20, 15, 10 or 5 ppm using a treatment process. Each households willingness to pay for each level of clean-up is given in the diagram below. The marginal cost of clean-up is given in the bottom row.

) How does MWTP (say, of household A) for cleanup change as the level of contaminant changes. How does marginal cost change? Explain. b. (1.5 marks) What level of clean-up would each household desire on their own? Explain your answer. c. (1.5 marks) Who would we predict to free-ride? Explain your answer. d. (2 marks) What is the value the society (comprised of these 3 households) places on each unit of water quality? Explain how you got your answer. e. (2 mark) What is the socially efficient level of water quality? Give an intuitive explanation of your answer. f. (2 marks) Is there a market failure here?

15 ppm 20 ppm 25 ppm Household A's MWTP Household Bs MWTP Household C's MWTP Marginal Cost of Cleanup 5 ppm 45 0 5 10 ppm 55 0 10 90 10 15 95 35 20 110 60 30 240 150 115 65 50