Consider the allocation of a fixed, renewable supply of surface water in a given year between two competing users: municipal and industrial users (M) and agricultural users (A). The demand for water by M-users is MB­M = 250 – QM and the marginal extraction cost is MXCM = 50. The demand for water by A-users is MB­M = 170 – 0.5*QM and the marginal extraction cost is MXCM = 20. S is the annual supply of surface water is the basin. Assuming that there is no water scarcity in the basing (i.e., S > S’), what is the efficient level of water use for M- and A-users?

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