Consider a river found in the city of Philadelphia, and then answer the question

Question

Consider a river found in the city of Philadelphia, and then answer the questions that follow The city has a resort 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 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 river to levels safe for recreation, and the resort would no longer be affected. If the tannery uses the recycling method, then the tannery's economic profit is $1,500 per week, and the resort's economic profit is $1,800 per week. If the tannery does not use the recycling method, then the tannery'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.

Explanation / Answer

Suppose the resort has the property rights to the river. That is, the hiking lodge has the right to a clean (unpolluted) river. In this case, assuming the two firms can bargain at no cost, the tannery will use the recycling method and will pay the hiking lodge 0 per week.

Now, suppose the chemical plant has the property rights to the river, 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 500 and 800 per week.

The resort will make the most economic profit when they have the property rights .

True or False: The river will remain polluted, regardless of who has the property rights.

False

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