Consider a city with a river. The city has a resort whose visitors use the river

Question

Consider a city with a river. The city has a resort whose visitors use the river for recreation. The city also has a chemical plant that creates industrial waste, which it dumps into the river. This pollutes the river and makes it a less desirable vacation destination. That is, the chemical plant's effluent decreases the resort's economic profit. Throughout this problem, assume that negotiations are costless. Suppose that the chemical plant could use an alternative production method involving water recycling. This would reduce the pollution in the river 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 $15,000 per week, and the resort's economic profit is $17,000 per week. If the chemical plant does not use the recycling method, then the chemical plant's economic profit is $20,000 per week, and the resort's economic profit is $10,000 per week. Total economic profit (the chemical plant's economic profit and the resort's economic profit combined) is highest when the recycling production method is not used used When the chemical plant uses the recycling method, the resort earns $17,000 - $10,000 = $7,000 more per week than it does with no recycling. Therefore, the resort should be willing to pay up to $7,000 per week for the chemical plant to use water recycling. However, the recycling method decreases the chemical plant's economic profit by $20,000 - $15,000 = $5,000 per week. Therefore, the chemical plant should be willing to use the recycling method if it is compensated with at least $5,000 per week. Suppose the resort has the property rights to the river. That is, the resort has the right to a clean (unpolluted) river. In this case, assuming the two firms can bargain at no cost, the chemical plant will the recycling method and will pay the resort between $2,000 and $5,000 $0 between $0 and $2,000 between $5,000 and $7,000 rTFel per week. not used used Now suppose the chemical plant has the property rights to the river, including the right to pollute it. In this case,

Explanation / Answer

solution A) . Chemical plant economic profit and resort economic profit if recyling method is used is given by 15000 and 17000.total profit is given by 32000.While if no recyling method is used then ecoomic profit of chemical plant and resort is given by 20000 and 10000.Total profit in this case is 30000.Therefore total profits will be high when recycling production method is used.

B. When the property right is vested in the hands of resort,then it will be maximizing its own economic profit regardless of the economic profit earned by the chemical plant.It will not allow emission of effulent in the river and prevent it from polluting.Therefore in this case chemical plant will not use recyling method of production and pay the resort 0 dollar per week.

C.When the property right is vested in the hands of chemical plant it will be maximizing its own economic profit regardless of whatever economic profit resort is earning.It will definetely pollute the river.In this case it will not be using recycling production method and paying zero dollar to resort.

D,the resort will make te economic profit when it has property right to clean the river and the chemical plant will make economic profit when it has the property right to pollute the river.

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