Question

Consider a village with a lake. The village has a campground whose visitors use the lake for recreation. The village also has a research lab that creates Industrial waste, which it dumps into the lake. This polutes the lake and makes it a less desirable vacation destination. That is, the research lab's efuent decreases the campground's profit. Throughout this problem, assume that negatiations are costless. Suppose that the research lab could use an alternative production method involving water recydling. This would reduce the pollution in the lake to levels safe for recreation, and the campground would no longer be affected. If the research lab uses the recycling method, then the research lab's profit is $19,000 per week, and the campground's profit Is $27,000 per week. If the research lab does not use the recycling method, then the research lab's profit Is $25,000 per week, and the campground's profit is $18,000 per week. Tatal profit (the research lAs profit and the campground's profit combined) is highest when the recycling production method is When the research lab uses the recycling method, the campground earns $27,000-$18,000 $9,000 more per week than it does with no recycling. Therefore, the campground should be willing to pay up to $9,000 per week for the research lab to use water recycling. However, the recycling method decreases the research lab's profit by $25,000-$19,000 $6,000 per week. Therefore, the research lab should be willing to use the recycling method ifit is compensated with at least $6,000 per week. Suppose the campground has the property rights to the lake. That is, the campground 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 campground per week. 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 no cost, the research lab will campground will pay the research lab the recycling method, and the per week. Which of the following statements are correct? Check all that apply The research lab will only use the recycling method if the camporound has the property rights. The research lab will use the recycling method regardless of who has the property rights. The campground will make the most profit when the research lab has the property rights to pollute the lake, and the research lab will make the most profit when the campground has property rights to a clean lake.

Answer 1

ARANDE. . Answer: Given information of a village Lake. Research lab's profit is = $19, coo per week. Campgrounds profit is = 427 000 per week. If not used recyeling method deprofit = 825000 / week. camp profit = $18000 / week. • Total profit is highest when recycling production method 1x used cies = 19000 + 27000 = $ 46000) when campground have property rights, it will accept any payment above $9000 to let research Lab create pollution. The research lab will use the recycling method and pay the campground $0 per week. Its profit falls by $6000 if it uses the recycling method which is better than paying $9000 to compensate for not using

the recycling method. - profit of campground = 87000 profit of research lab = 19000] when research lab has property rights, it will use the recycling method and the campground will pay him between $ 6000 to 89000 per creek for not polluting. • Profit of Campground = $27000 - 89000 - 1818000] 1 . profit of gefearch lab = $19000 + compensation Csay 25000) Ć (8.25000 . Correct statement: • Statement (3) is falie, as camp ground makes most profite when campground has the property rights · Statement l) is correct.