Question

2. Farmers in the dry Western states irrigate their crops by drilling wells into the Ogallala aquifer, a huge underground reservoir left after the last Ice Age. As farmers pump more and more water from the aquifer, all must drill deeper to reach water; and the deeper the well, the more costly it is to pump the water. Identify the missing property rights in this instance. Is there an economic argument for limiting the amount of water farmers can pump from their wells? What kind of policy do you suggest? 3. If the marginal external cost of gasoline consumption is 25 cents a gallon and the market equilibrium quantity exceeds the efficient quantity by 8 billion gallons, what would be the inefficiency cost of the externality in dollars? Show your work. 4. Suppose 80% of the $8 billion construction cost of the new urban transit system in Los Angeles is paid by the federal government. From the perspective of the state of California, what is the economic cost of construction? What is this cost from the perspective of the federal government? (California accounts for about 10% of the nation's income.)

Answer 1

Due to presence of HOMEWORKLIB POLICY, I am answering one question.

3.

Ans:

Inefficiency Cost of externality = 0.5 (0.25)(8) = 1 billion dollars.

In the figure:

Marginal external cost = MSC - MPC = $ 0.25

Q1 - Q2 = 8 billion gallons

Inefficiency cost of externality = Welfare loss = Grey area.

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