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 town of Center Barnstead, and then answer the questions that follow. The town has a resort whose visitors use the lake for recreation. The town also has a tannery that dumps industrial waste into the lake. This pollutes the lake and makes it a less desirable vacation destination. That is, the tannery's waste decreases the resort's economic profit Suppose that the tannery 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. Ir the tannery uses the recycling method, then the tannery's economic profit is $1,300 per week, and the resort's economic profit is $2,300 per week. I the tannery does not use the recycling method, then the tannery's economic profit is $2,100 per week, and the resort's economic profit is1,100 per week. These figures are summarized in the following table. Complete the following table by computing the total profit (the tannery's economic profit and the resort's econormic provit combined) with and without recycling. Profit Tannery Resort Total Action (Dollars) (Dollars) (Dollars) No Recydling 2,100 1,100 Recycling1,300 300 Total economic profit is highest when the recycling production method is not used When the tannery uses the recyding method, the resort earns $2,300- 1.200 more per week than it does with no recycling. Therefore, the resort should be willing to pay up to $1,200 per week for the tannery used However, the recycling method decreases the tannery's

Explanation / Answer

Following is the complete table -

Total economic profit is highest when the recycling production method is used.

Suppose, the resort has the property rights to the lake. That is, the resort has the right to a clean (unpolluted) lake. In this case, the tannery will use the recycling method and will pay resort $0 per week.

Now, suppose the Tannery has the property rights to the lake, including the right to pollute it. In this case, assuming the two firms can bargain at no cost, the tannery will use the recycling method and the resort will pay the tannery between $800 and $1,200 per week.

The tannery will make the most economic profit when it has the property rights to pollute the lake.

If adequately compensated then tannery can use the recycling method even if it has the property rights.

So, it is not that the tannery uses the recycling method only if the resort has the property rights.

Thus, the given statement is True.

Action Tannery Resort Total No Recycling 2,100 1,100 3,200 Recycling 1,300 2,300 3,600

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