Question

1. 4.5 [Related to Solved problem 8.2] States and territories in Australia all have monopoly-operated water companies that provide water to homes and businesses. Water pricing could be done either by charging a flat monthly fee, or water could be charged by the kilolitre. Which method of pricing do you think is more likely to result in economic efficiency in the water market? Make sure you refer to the definition of economic efficiency in your answer.

Answer 1

Charging water by kilolitre is best for economic efficiency as it helps prevents wastage of consumption of water and charges consumers commensurately for their utilisation of water and thus preventing monopolist to profit unevenly in case of flat fees. This resulted in win win situation or economic efficiency where goods are allocated equally and wastage is eliminated as per textbook definition.

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