Answer:
(a) Efficient Quantity of miles preserved Q = 1000/600 = 1.67miles
(b) Economic Surplus =
= 139 dollars
Explanation:
(a) Efficient Quantity is obtained where Demand curve meets Supply Curve
(Aggregate) <u>Demand Curve is given by P = 1000 - 100q </u>
(That's adding 100 individual demand curve. For example, at the first mile preserved, each would be willing to pay 10 - 1 = 9 dollar, so 100 people would be willing to pay 900 dollar)
<u>Supply Curve is given by P=500q </u>
(For every additional mile preserved the the price increases 500 dollar, and the first mile would cost 500 dollar)
Demand and Supply Curves meet at equilibrium price, given by 1000 - 100q = 500q.
Solving for q we get 1.67
(b) Economic Surplus is given by the area under the Demand Curve but above the Price (the vertical dotted line). In other words, ![S_{a}](https://tex.z-dn.net/?f=S_%7Ba%7D)
Because the community is willing to pay for a+b+c to preserve the river at the efficient quantity but only have to pay b+c (Quantity x Price)
Efficient Price is obtained at efficient quantity. P = 1000 - 100*1.67 = 833
= 0.5*(1000-833)*1.67 = 139 dollars
Question answered