1. Efficient regulation. Suppose the state is trying to decide how many miles of a very scenic river it should preserve. There are 1000 people in the community, each of whom has an identical demand function given by
Q = 40−0.4P
where Q is the number of miles preserved and P is the per-mile price he or she is willing to pay for Q miles of preserved river. (Hint: You will need to derive the market (aggregate) demand curve for a public good.)
(c) What if substitute sites were available to the members of the community such that their demands were substantially more elastic? Suppose their individual demand functions for river preservation are:
Q = 40−1.2P
If the marginal cost of preservation is $25, 000 per mile per year, how many miles of the river would be preserved in an efficient allocation?