Suppose the private marginal cost of pumping water from an aquifer remains constant as the quantity of water pumped increases, and the marginal social cost is upward sloping. If the demand for water shifts to the right as population increases, then the amount of water pumped based only on private costs ________ and the social cost of the common property resource ________.
A) decreases; decreases.
B) decreases; increases
C) increases; decreases
D) increases; increases

Question

Quizplus · Accepted Answer

When demand shifts right due to population increase, more water is pumped based on private costs, ignoring the rising social costs. This leads to an increase in both the amount of water pumped and the social cost associated with overuse of the common resource.

Suppose the Private Marginal Cost of Pumping Water from an Aquifer