We are concerned with the water quality in the Mississippi River. There are 4 groups of people who use the river: environmentalists, fishermen, sightseers, and wastewater plant executives. The marginal benefit function for an improvement in water quality for each of the groups is:
MBe = 15 - Q , MBf = 10 - Q , MBs = 8 - Q , MBw = 6 - 2Q
while the marginal cost of improving water quality is : MC = 1 + Q
a) Derive the aggregate marginal benefit function, Σ MB.
b) What is the efficient level of water quality?
c) Suppose the government performs a study and finds out that the methods used to increase the water quality have an external cost on the environment since the waste removed from the river isn't removed properly and seeps back into the groundwater of a nearby city. they estimate that the social marginal cost function for water quality is MCs = 5+3Q/
1. What is the socially optimal level of water quality?
2. Given a budget equation and set of indifference curves, explain in no more than two sentences how one would determine the optimal bundle.