Hi k9queen!!!
a)What would the effects of the drought on the equilibrium price and
quantity of water be?
The supply curve shifts to the left, leading to a rise in the
equilibrium price and a decline in the equilibrium quantity.
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b)Many communities did not allow the price of water to change,
however. What is the effect of this policy on the water market?
In the communities where the price of water is not allowed to change,
there will be an excess demand for water (for the new supply curve),
this is a shortage of water supply.
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c)A 1991 op-ed piece in the Wall Street Journal stated that "All Los
Angeles residents are required to cut their water usage by 10% as of
March 1 and another 5% starting May 1, based on their 1986 consuption
levels." The author criticized this policy on both efficiency and
equity grounds, saying, "not only does such a policy reward families
who "wasted" more water back in 1986, it does little to encourage
consumers who could make more drastic reductions, (and)...punishes
consumers who cannot so readily reduce their water use." In what way
is the Los Angeles system for allocating water inefficient? In what
way does the system seem unfair?
This system was inefficient because it does not allocate water to
people who gives it a high value, in consequence people who value
water more than its production cost cannot obtain all the water that
they need, so the total surplus wasn't maximized.
This allocation system is unfair because the water is allocated
considering only past usage, so the wastefulness of water in the past
is rewarded. Where the family's demand for water increases, for
example because of an increase in the family size, this policy does
not allow them to obtain the new amount of water needed. Families that
use water mostly for drinking and/or to cover other basic necessities
and cannot replace it (poorest families) will be penalized, while
wealthiest families will have to reduce only luxury uses of water
like car washing, pools, garden irrigation, etc.
On the other hand, this policy of allocating water avoid a rise in the
price of water, this let poor families buy the water without increase
the weight of water in the family budget.
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d)Suppose instead that Los Angeles allowed the price of water to
increase until the quantity demanded equaled the quantity supplied.
Would the resulting allocation of water be more efficient? In your
view, would it be more or less fair than the proportionate reductions
in water use mentioned in the newspaper artice? What could be done to
make the market solution more fair?
In this case the allocation will be more efficient: Quantity supplied
will equal quantity demanded and the shortage is avoided. The total
surplus will be maximized.
This allocating system seems to be more fair, but a deffinitive
opinion is difficult to state. Because the shortage is avoided, the
supply will be higher than under the water restrictions, so the
reduction in water usage will be less, but the increase of the weight
of water in the budget of poor families will be greater than the
increase for the wealthiest families.
To give a more fair market solution we need the government
intervention; the government must give a tax relief for poorer
families to lighten them from paying the higher water prices.
I hope this helps you. If you need a clarification feel free to post a
request for it.
Best regards.
livioflores-ga |
