8. The effects of property rights on achieving efficiency Consider a river found

Question

8. The effects of property rights on achieving efficiency Consider a river found in the city of Philadelphia, and then answer the questions that follow. The city has a hiking lodge whose visitors use the river for recreation. The city also has a tannery that dumps industrial waste into the river. This pollutes the river and makes it a less desirable vacation destination. That is, the tannery's waste decreases the hiking lodge's economic profit. Suppose that the tannery could use a different production method that involves recycling water. This would reduce the pollution in the river to levels safe for recreation, and the hiking lodge would no longer be affected. If the tannery uses the recycling method, then the tannery's economic profit is $1,300 per week, and the hiking lodge's economic profit is $2,300 per week. If the tannery does not use the recycling method, then the tannery's economic profit is $2,100 per week, and the hiking lodge's economic profit is $1,100 per week. These figures are summarized in the following table.

Explanation / Answer

Action

Tannery

Hiking lodge

Total

No recycling

2100

1100

3200

Recycling

1300

2300

3600

So when recycling method is used than total economic profit is highest so recycling method is used.

Tannery uses the recycling method and will pay 0 as 2100-1300<2300-1100.

Tannery will not use the recycling method and will pay between 0 to 400 (3600-3200)

Has right to pollute river means no recycling

False : as in terms of recycling method two of the firms has to pay the cost to other whether they has legal right to clean.

Action

Tannery

Hiking lodge

Total

No recycling

2100

1100

3200

Recycling

1300

2300

3600

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