Suppose That a Local Government Has Imposed a Quota of 0.5

question 49

Essay

Suppose that a local government has imposed a quota of 0.5 million gallons on water usage. Before the quota is enforced, the market demand curve is given by
Q^D = 10 - 2.25P
and the market supply curve is given by
Q^S = -10 + 2.75P
where the quantity is measured in millions of gallons per month and the price is in dollars per thousand gallons.
a. How will the quota influence the market price of water? The quantity of water sold?
b. Calculate the deadweight loss resulting from the quota.