Problem
Suppose the EPA determines that U.S. water resources are not being used efficiently. They find the marginal cost and benefit to be represented by the following equations:
M C(q) = 15 + q
M B(c) = 100 -4q
They also determine that there are external costs associated with water consumption, which are not accounted for in current water markets. The external cost be can thought of as M C(q) = 10 + 0.5q.
i. Calculate the price and quantity at which the market is currently consuming water (inefficiently).
ii. Calculate the socially optimal price and quantity in the water market.