The Las Vegas Valley Water District (LVVWD) is a not-for-profit agency that began providing water to the Las Vegas Valley in 1954. The District helped build the city's water delivery system and now provides water to more than one million people in Southern Nevada. District water rates are regulated by law and can cover only the costs of water delivery, maintenance, and facilities. District water rates are based on a four-tier system to encourage conservation. The first tier represents indoor usage for most residential customers. Rate for remaining tiers becomes increasingly higher with the amount of water usage.
To document the deadweight loss from monopoly problem, allow the monthly market supply and demand conditions for water in the Las Vegas Water District to be:
QS = 10P(Market Supply)
QD = 120 - 40P(Market Demand)
Where Q is water and P is the market price of water. Water is sold in units of one thousand gallons, so a $2 price implies a user cost of 0.2 cents per gallon. Water demand and supply relations are expressed in terms of millions of units.
A. Graph and calculate the equilibrium price/output solution. How much consumer surplus, producer surplus, and social welfare is produced at this activity level?
B. Use the graph to help you calculate the quantity demanded and quantity supplied if the market is run by a profit-maximizing monopolist. (Note: If monopoly market demand is P = $3 - $0.025Q, then the monopolist’s MR = $3 - $0.05Q)
C. Use the graph to help you determine the deadweight loss for consumers and the producer if LVVWD is run as an unregulated profit-maximizing monopoly.
D. Use the graph to help you ascertain the amount of consumer surplus transferred to producers following a change from a competitive market to a monopoly market. How much is the net gain in producer surplus?