Question

Conomic efficiency is more likely to result in the water market if cities charge part 3

a. by the gallon because homes and businesses will not consume gallons of water for which marginal benefit is greater than price.
b. a flat monthly fee because the price of consuming an additional unit of water to homes and businesses will equal the marginal cost of providing the water.
c. by the gallon because the price of consuming additional water to homes and businesses will be lower than if the city charged a flat monthly fee.
d. a flat monthly fee because homes and businesses will only consume gallons of water for which marginal benefit is greater than price.
e. by the gallon because homes and businesses will not consume gallons of water for which marginal benefit is less than price.

Answer 1

Economic efficiency is achieved in water markets when pricing is done by the gallon, aligning consumption with the principle that the price should be equal to the marginal cost to reflect the efficient allocation of resources.

Step-by-step explanation:

Economic efficiency in water markets is more likely if cities charge by the gallon, because this pricing method ensures that homes and businesses will opt not to consume water when the marginal benefit is less than the price. This reflects the principle that in a perfectly competitive market, efficient allocation of resources occurs when the price is set equal to marginal cost, ensuring that the value to consumers of the last unit bought and sold is equal to the cost of producing it. Charging a flat monthly fee does not align with this principle as it does not account for the varying levels of utility that different units of consumed water provide to customers, and may lead to overconsumption if the marginal cost of providing additional units of water is ignored.