Question

2. A significant new source of water in the form of two aquifers was recently discovered in the dry northern region of Turkana in Kenya, East Africa where a significant population lacks access to safe water. As background information, the aquifers contain nearly 250 billion cubic meters of water (66 trillion gallons) and are recharged at a rate of 3.4 billion cubic meters (898 billion gallons) each year. The recharge rate is how much water goes back into the aquifer from rainfall, seepage from rivers, and other natural sources, and is about the amount of water consumed annually in Austria. The aquifers represent an open access resource (common property resource) that is subject to overuse, so this can be assessed the same way fisheries would be analyzed. If water is removed from the aquifer for irrigation and household use by wells and the aquifer is not owned by any individual, there may be too many wells used to pump water. a. (3 points) Complete the following table assuming that the cost to operate each well is 600 shillings per day and the water has a value of 0.1 shillings per gallon (shillings are the local currency with 1 U.S. dollar = 105 Kenyan Shillings, but do not convert your answers to dollars, just use shillings). b. (2 points) If each well is owned by an individual, how many wells will be operated if individuals treat the aquifers as a common property resource water (you don't have the exact answer – the answer is between two values)? Explain your answer. c. (2 points) What is the economically efficient number of wells that should be pumping? Explain your answer. per well Marginal Total Average Revenue per Revenue Cost well (Operating Total Q cost x Revenue | Profit ATR TR Wells (Gal/day) Wells) ( PQ) (TR- TC) AWells Wells 10 100,000 6,000 1000 20 200,000 12,000 30 280,000 18,000 40 340,000 24,000 50 380,000 30,000 60 400,000 36,000 70 400,000 42,000 80 380,000 48,000 90 340,000 58,000 Note: P = Price; Q-quantity (gallons/day) TR is total revenue; TC = total cost; ATR = change in TR in this case, TR from 20 wells minus TR from 10 wells) and AWells = change in number of wells (e.g., 20 - 10).

Answer 1

d) it can be achieved through imposing tax, so social optimal level can be achieved

Date Q ! (gal/day) TC MR Wells МС. AR 1600 100 OD 10 6,000 10,000 1600 1600 20 200,oo 12,000 18,000 1532-33 30 280,000 IL SO 600 чо : 1200 340,000 24, onu TR 16,000 32.000 46,000 53,000 68,000 76,000 82,000 86.000 88,000 1000 1360 30 600 2.0,00 20,00 28,000 34,000 38,000 40,000 40,000 38,000 30,000 60 36,000 1266.67 800 380,00 400,000 400,000 390,000 340,000 70 606 42,00v 48.00u 58,000 LOO 600 1075 90 200 977.78 1000 Total Revenue (600x Wells) + (0.1 Profit TR-TC Marginal Revenue per nella ATR A wells Average Revenue TR wells Marginal Cost per wall: ATC A wells then b) y individuals treat the aquifers as a common property resource water be operated. level P = MC total production conomically wells that should be pumping 70 wells As at this level. MC.=MR. means marginal social cost - marginal social benefit. econ number g