(Solved):   2. The Grande Ronde Aquifer is the main source of drinking water for the Palouse region wh ...

 

2. The Grande Ronde Aquifer is the main source of drinking water for the Palouse region which includes cities of Moscow, Idaho and Pullman, WA. Assume that as long as you are an established resident within the Palouse region, you can did a well to tap the groundwater. All non-residents of Palouse region are not allowed to tap into the groundwater reservoir. Furthermore, assume that there is no regulator of the groundwater stock in the region. Given this scenario, is the equilibrium drinking water consumed by all households in the region "too much" or "too little" or equal to the social optimum? Explain why this occurs. Support your answer by drawing the private and social marginal cost curves and the marginal benefit curve for drinking water. Identify the deadweight loss area if any exists.