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Suppose two towns on either side of a river are planning to build a dam to obtain more water security and are discussing how high
Suppose two towns on either side of a river are planning to build a dam to obtain more water security and are discussing how high a dam is required. The town on the northern side, Cobramunga, have calculated their town's demand schedule for additional metres of dam at P = 60 - 6Q. The town on the southern side, Murrabit, has calculated their demand for metres of dam as P = 20 - 2Q. For both towns, P is in thousands of dollars and Q is in tens of metres. The marginal cost of building a dam wall is constant at $58,000 per 10 metres. An economist in Cobramunga has asked the Murrabit people if they would like to join forces and each pay their Lindahl prices for the socially optimal height of the dam wall. Thinking only of their own best interests, the people of Murrabit should: A. Free-ride off Cobramunga's higher demand, because Murrabit are would not buy any amount of dam by themselves. B. Pay their Lindahl prices because they are always better off with the socially optimal quantity of 27.50 metres. C. Free-ride off Cobramunga's higher demand, because it yields a higher surplus for Murrabit. D. Pay their Lindahl prices because they receive higher surplus than free-riding. E. There is not enough information to say what the people of Murrabit should do
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