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

Question

8. The effects of property rights on achieving efficiency Consider a lake found in the village of Sturbridge, and then answer the questions that follow. The village has a resort whose visitors use the lake for recreation. The village also has a chemical plant that dumps industrial vaste into the lake. This pollutes the lake and makes it a less desirable vacation destination. That is, the chemical plant's waste decreases the resort's economic profit Suppose that the chemical plant could use a different production method that involves recycling water. This would reduce the pollution in the lake to levels safe for recreation, and the resort would no longer be affected. If the chemical plant uses the recycling method, then the chemical plant's economic profit is $1,500 per week, and the resort's economic profit is $1,800 per week. If the chemical plant does not use the recycling method, then the chemical plant's economic profit is $2,000 per week, and the resort's economic profit is $1,000 per week. These figures are summarized in the following table. Complete the following table by computing the total profit (the chemica! plant's economic profit and the resort's economic profit combined) with and without recycling Profit

Explanation / Answer

Total profit in no recycling=3000 and from recycling=3300 thus in recycling total profit is maximised.

When resort has property right, recycling method will be used and resort payoff is 1800.

Now chemical plant has property right, chemical plant will use recycling method and gets a payoff of 2300 i.e. 1500+800

Resort payoff is maximised when recycled method is used.

Recycled method will be used irrespective of property rights.

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