Scenario: More than half of all residential water connections in Britain are not metered. Residential customers pay a flat fee regardless of usage. Scottish Water, which supplies water in Scotland, says there is no evidence that the installation of meters encourages lower than normal usage of water.

1.The Salmond family lives in a home that is not metered. The family consumes around 10,000 gallons a month. What is the family’s monthly demand curve for water, assuming that the demand curve is a straight line, and (the price is of water is £50 per 1,000 gallons) the Salmond family consumes nothing.
2.Calculate the total benefit and marginal benefit from water when the Salmond family consumes 10,000 gallons a month. What is the family’s buyer surplus?
3.Suppose that Scottish Water installs a water meter at the Salmond’s home and charges a price of £5 per 1,000 gallons. How much water would the family buy, and how much would it spend each month?
4.What is the maximum amount Scottish Water could charge the Salmond family for the consumption in question 3?

 

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