Suppose residents of Toadhop live on the Quabache River,a river prone to flooding.Suppose there are 1000 (type A) people who value flood control more than the 1000 (type B) people. Type A Demand Q_D = 100 - P
Type B Demand Q_D = 50 - P
Where Q measures the quality of flood control.If the price of a unit of flood control is $100,000 and the citizens of Toadhop gather for a townhall meeting to find the socially optimal level of flood control,and they are successful,they will pick Q equal to

Question

Quizplus · Accepted Answer

To find the socially optimal level of flood control, we need to set the total willingness to pay (TWTP) for each type of person equal to the cost of providing the flood control.

For Type A, TWTP = area under demand curve = $5,000,000
For Type B, TWTP = area under demand curve = $2,500,000
Total TWTP = $7,500,000

Since the cost of providing flood control is $100,000 per unit, the socially optimal level of flood control (Q) is:

Q = TWTP / cost per unit
Q = $7,500,000 / $100,000
Q = 75

However, Q cannot exceed the minimum demand between the two types of people, which is 50. Therefore, the optimal level is 25.

Suppose Residents of Toadhop Live on the Quabache River,a River