Suppose There Is a Water Shortage, and the Governor Proposes

question 54

Multiple Choice

Suppose there is a water shortage, and the governor proposes that the government distribute equal quantities of water to each person at no cost to the consumers. If consumers were forbidden to trade water, would such a distribution be Pareto optimal?

• A) Yes, because each person has the same amount of water as everyone else.
• B) Yes, because everyone would be receive their water for free.
• C) Not necessarily, as people may differ in their marginal rates of substitution between water and other goods.
• D) It is impossible to determine without knowing the price of water.
• E) none of the above

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Definitions:

Price Floor

A government-imposed minimum price below which a certain good or service cannot be sold, often set to protect producers or sectors.

Lobby

The act of attempting to influence the decisions of government officials, typically by special interest groups.

Binding Price Ceiling

A maximum price set by the government below the equilibrium price, preventing suppliers from raising the price above it, leading to shortages.

Surplus

The situation in which the quantity of a good supplied exceeds the quantity demanded, often resulting in downward pressure on prices.