Suppose the residents of Toadhop live on the Quabache River which is a river prone to flooding. Suppose there are 1000 (type A) people who value flood control more than 1000 (type B) people.
One type A citizens demand is QD = 100 - P
One type B citizens demand is QD = 50 - P
Where Q measures the quality of flood control and P represents the value that one person places on flood control. The marginal cost for each quality unit of flood control is $100,000.
a. If the citizens of Toadhop do not work together, what is the amount of flood control which will be purchased? Explain.
b. If the citizens of Toadhop gather for a town hall meeting to find the socially optimal level of flood control, and they are successful, they will pick Q equal to what value? Explain.