Relevant Information:

In the state of Florida, water for household use costs homeowners 50 cents per gallon. In order to manage the state's water resources most efficiently and prevent shortages due to drought and wasteful use, the Governor is consideringchoosing between imposing a 25 cent tax per gallon of water consumed on every homeowner's water bill, or setting a binding price floor of 75 cents per gallon through legislative action. For simplification, assume that the elasticity of supply and demand are unit elastic for purposes of your analysis. (This is important, remember the definition of "Incidence").

a) Using the supply and demand graphs below, illustrate how the two scenarios would look from an economist's standpoint and what the economic impact would be on the supply and demand for water and equilibrium price and quantity under each scenario.

b) Describe the political and economic considerations of each policy, and make a recommendation for the Governor as to which policy you think should be implemented in order to effectively address the Governor's objectives. Support your conclusion with economic reasoning.

\f