Question
Consider a village well which is operated by a pump with capacity 200 litres a day. The marginal cost of drawing water from the well
Consider a village well which is operated by a pump with capacity 200 litres a day. The marginal cost of drawing water from the well is 5x if x litres of water has been drawn and if the pump has not crossed its capacity. The Marginal cost jumps to 20x litre if the pump's capacity for the day is exhausted. The water can be sold in the open market at 40 rupees per litre. There are 50 households in the village. a) Is the private marginal cost coinciding with the social marginal cost in this case? Explain. b) What kind of market failure is this? What kind of good is the well water? Explain the usual problem that the market faces in these cases. c) In a graph, plot the private marginal cost, social marginal cost and marginal benefit. d) How much water should households draw in order to maximize profit? What is the socially optimal amount that households should draw?
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