Answer: Each resident will fail to adequately consider the external cost of his or her own water use
Step-by-step explanation:
Early settlers in the town of Dry Gulch drilled wells to pump as much water as they wanted from the single aquifer beneath the town. (An aquifer is an underground body of water.) As more people settled in Dry Gulch, the aquifer level fell and new wells had to be drilled deeper at higher cost. The residents of Dry Gulch will overuse water relative to the social optimum because the marginal cost of water is increasing.
Because water is becoming a scarce resource in Dry Gulch due to the higher cost of drilling wells, the benefit of using it increases and this will result in each resident using it without considering the external cost of his or her own usage. In the face of scarcity, humans will always act to satisfy their self-interest without considering others, hence they will likely overuse water in Dry Gulch since it is becoming a scarce resource.