Assume that the estimated marginal cost of a technology to purify water is EMC = 2 + 2q. Assume that the marginal benefit of one unit of cleaner water is M B = 14 ? 2q.

a. What is the estimated optimal quantity of cleaner water?

b. What is the estimated optimal price, pe, to pay for one unit of cleaner water?

c. Now assume the true marginal cost is MC = 6 + 2q. What is the true optimal quantity of cleaner water?

d. If we use the former optimal estimated quantity (in a.) to coordinate, how many units of cleaner water will be generated? Do we over-generate or under-generate cleaner water? Draw a graph and show the welfare loss.

e. If we use the former optimal estimated price to coordinate, how many units of cleaner water will be generated? Do we over-generate or under-generate cleaner water? On the same graph, show the welfare loss.

f. Is the price signal better, or is the quantity signal better in this case, in terms of having smaller welfare loss? Why?