Question

1. Consider two otherwise identical communities; call them P and N. suppose that P, all homes, apartments, and businesses have meters that record the usage of water. In addition, the users of the water must pay more when use more water. Thus, water is priced like most other goods. In community N, there are no meters and the local supplier of water of water charges everyone in the community a fixed amount per person, per month for their water service. Thus, using another gallon costs the user nothing. In which community will per capita water usage be higher? Explain, using the relevant principles of economics. 2. Referring back to the facts of the previous question: Suppose you knew that in one community water is supplied by a privately-owned company, while in the other community water is supplied by the local government. In which community do you predict that water is supplied by the privately-owned company? Explain.

Answer 1

1. The community N per capita water usage will be higher because of the behaviour of the people i.e, (free ridership) the population of the community N will behave in an irresponsible way and also principle of Moral Hazard steps in. People will voluntarily use more water than expected of the fixed cost they will incur and this will lead to more per capita consumption than community P.

Answer 2

I don't know the answer

Answer 3

Community N people will use more water because they aren't charged for every gallon like the other community is