1
$\begingroup$

Let be two cities with the same population, one in the desert and the other one not in the desert. Both are going to need water infrastructure to supply water to the inhabitants. The cost to build water infrastructure in both cities is more or less the same. The city not in the desert needs a pipeline of 10 Km long from the water source. The city in the desert needs a 500 Km pipeline from the water source. The only important difference in the water infrastructure is this transportation pipeline.

Now, according to supply and demand law, both cities have the same demand (more or less, let's neglect the increased consumption because of the heat, imagine a tempered desert) and the same supply, so the price of water would be the same. But the infrastructure in the desert cost more because of the long pipeline, so the price should be higher.

Is this true or not?

$\endgroup$
2
  • 2
    $\begingroup$ The city in the desert has a greater urgency of demand. If their pipeline breaks, the city will likely die before another can be built. I $\endgroup$
    – Richard
    Dec 2, 2022 at 1:54
  • 4
    $\begingroup$ When you buy water in the desert city, you're also paying a fraction of the construction and upkeep cost of the 500km pipeline. $\endgroup$ Dec 2, 2022 at 2:06

1 Answer 1

3
$\begingroup$

The cities won't have the same supply. Supply is the relationship between the price and the quantity supplied to the market (you should not confuse quantity supplied with supply). Higher costs mean that firms will require higher price to supply the same quantity.

Although the pipeline is probably mostly fixed cost (so once it is built there is little additional cost of operating it), firms will not enter the industry unless their expected ex ante profits are non-negative. So the supply in the desert city will be shifted to the left relative to non-desert city, especially when we look at it from ex ante and long run perspective.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.