You are hired as a consultant for a municipality, and asked to help determine how the city should price water from a surface water source for two users: Person A and Person B

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You are hired as a consultant for a municipality, and asked to help determine how the city should price water from a surface water source for two users: Person A and Person B. Both users extract the water for consumptive-use. Assume that the city only needs to be concerned with current use (i.e. this surface water source is completely renewable from one period to the next). You are told that the marginal cost of supplying this water to Person A and Person B is constant at $5 per unit (i.e. MC = 5). You are able to determine that Person A’s inverse demand function for water can be represented by P = 15 –2Q, and Person B’s inverse demand function for water can be represented by P = 25 –2Q.

If the fixed supply of water is 20 units, what is the efficient allocation for person A? What is the efficient allocation for person B?