California is the most populous state in the nation with about 39 million people, an increaseof more than 2 million people over the past five years (a 5 percent growth rate over that time).
1. What impact does this have on the demand for water? Show this graphically in a supply/demand diagram for water in California with one demand curve for 2010 and another for 2015 (the most recent date for the population). Clearly label your curves and equilibrium prices and quantities. To the side of your graph, write what the change in equilibrium price and quantity would be in an unregulated market for water.
2. Between 2011 and 2015, California experienced one of the worst droughts in its history. In a new supply/demand graph for water in California, show the impact of the drought. Clearly label your curves and equilibrium prices and quantities. Just show this change only, not combined with part 1. Assume there is some ability to import water and pump groundwater, so the supply curve is not vertical.
3. Now consider these two changes together. What is the combined impact of the drought and the change in demand resulting from increasing population on market equilibrium? Clearly state the net impact on both equilibrium price and quantity. Again, do not assume the supply curve is vertical.