A vigorous debate rages over which of two potential urban water supply programs is an economically better way to supply safe affordable drinking water to residents of a large poor city. The high points of each program are:
Program 1: Supply a minority of the population with cheap piped‐in water by delivering 10,000 acre feet per year of utility supplied water from a central delivery system, at a price equal to the average cost of supply, $300/ac‐ft. The remainder of water must be bought from street vendors described, for example, at https://www.wiego.org/informal-economy/occupational-groups/street-vendorsLinks to an external site. at a price of $900 / ac‐ft.
Program 2: Supply the entire population by meeting all demands at a constant price. This program would build and use a shiny new engineered central delivery system that supplies water at a constant price equal to the average cost of supply. That price is $600 / per acre foot, charged to all buyers, for which total use is 70,000 ac-ft.
Your task is to compare Total Annual Economic Benefits (TAEB = CS + TR – TC) of each program by ranking the economic performance of each from the view of the city’s water buyers/suppliers. You can use these abbreviations:
CS = consumer surplus = willingness to pay minus actual payments calculated for each program
TR = total revenue = price x quantity calculated for each program
TC = total cost = average cost x quantity calculated for each program
I will show you more about these terms in our class slides this week, letting you see a down-sloping water demand function for which the maximum price of water (y intercept) is $1650 per ac‐ft.
Q 1 (15 points) Calculate the Total Annual Economic Benefits (TAEB) to the city’s water stakeholders for each program and show calculations.
Q 2 (10 points). You have been hired as an expert consultant, and will snag a juicy consulting fee if you recommend the right choice. Describe your recommended choice and explain why you would make it.
