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

Question

Consider a city with a lake. The city has a resort whose visitors use the lake for recreation. The city also has a tannery that creates industrial waste, which it dumps into the lake. This pollutes the lake and makes it a less desirable vacation destination. That is, the tannery's effluent decreases the resort's profit. Throughout this problem, assume the negotiations are costless. Suppose that the tannery could use an alterantive production method involving water recycling. This would reduce the pollution in the lake to levels safe for recreation, and the resort would no longer be affected. If the tannery uses the recycling method, then the tanner's profit is $15,000 per week, and th resorts profit is $17,000 per week. If the tannery does not use the recycling method, then the tannery's profit is $20,000 per week, and the resorts profit is $10,000 per week. The total (the tannery's profit and the resorts profit combined) is highest when the production method is ________ (USED / NOT USED). When the tannery 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 tannery to use water recycling. However, the recycling method decreases the tanner's profit by $20,000-$15,000= $5,000 per week. Therefore, the tannery 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 lake. That is, the resort has the right to clean (unpolluted) lake. In this case, assuming the two firms can bring bargain at no cost, the tannery will _________ (USE / NOT USE) the recycling method and will pay the resort _________ (BETWEEN $0 AND $2,0000 / BETWEEN $5,000 AND $7,000 / BETWEEN $2,000 AND $5,000 / $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 _______ (NOT USE / USE) the recycling method, and the resort will pay the tannery ____________ (BETWEEN $0 AND $2,0000 / BETWEEN $5,000 AND $7,000 / BETWEEN $2,000 AND $5,000 / $0 ) per week. Which of the follow statements are correct? Check all that apply. 1. The lake will remain polluted regardless of who has the property rights. 2. The tannery will only use the recycling method if it has the property rights. 3. The resort will make the most profit when it has property rights to a clean lake, and the tannery will make the most profit when it has the property rights to the polluted lake. Thank you!

Explanation / Answer

a) by recycling method total profit=32000

not recycling total profit=30000. so recycling should be used.

b)tannery will use the recycling process and resort will pay 0 per wek

c) 3 is correct

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