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

Question

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 research lab that dumps industrial waste into the lake. This pollutes the lake and makes it a less desirable vacation destination. That is, the research lab's waste decreases the resort's economic profit. Suppose that the research lab 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 research lab uses the recycling method, then the research lab's economic profit is $1,500 per week, and the resort's economic profit is $2,800 per week. If the research lab does not use the recycling method, then the research lab's economic profit is $2,300 per week, and the resort's economic profit is $1,600 per week. These figures are summarized in the following Complete the following table by computing the total profit (the research lab's economic profit and the resort's economic profit combined) with and without recycling. Total economic profit is highest when the recycling production method is used When the research lab uses the recycling method, the resort earns $2,800- $1,600= $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 research lab to recycle water. However, the recycling method decreases the research lab's economic profit by $2,300 - $1,500= $800 per week. Therefore, the research lab should be willing to use the recycling method if it is compensated with at least $800 per week. 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, assuming the two firms can bargain at no cost, the research lab will the recycling method and will pay the resort per Now, suppose the research lab has the property rights to the lake, including the right to pollute it. In this case, assuming the two firms can bargain at per week. no cost, the research lab will not use the recycling method, and the resort will pay the research lab The research lab will make the most economic profit when I the resort has property rights to a clean lake it has property rights to pollute the lake True or False: The lake will remain polluted, regardless of who has the property rights. True False

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, assuming the two firms can bargain at no cost, the research lab will use the recycling mathod and will pay the resort $0 per week.

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

The research lab will make the most economic profit when it has the right to pollute the lake.

The cirrect answwer is False.

Action Research lab Resort Total No recycling 2,300 1,600 3,900 Recycling 1,500 2,800 4,300

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.