Question

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 chemical plant that dumps industrial waste into the lake. This pollutes the lake and makes it a less desirable vacation destination. That is, the chemical plant's waste decreases the resort's economic profit. Suppose that the chemical plant 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 chemical plant uses the recycling method, then the chemical plant's economic profit is $1,500 per week, and the resort's economic profit is $1,800 per week. If the chemical plant does not use the recycling method, then the chemical plant'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. Complete the following table by computing the total profit (the chemical plant's economic profit and the resort's economic profit combined) with and without recycling. Profit

Answer 1

The net profit of chemical plant and resort is

	Chemical plant	Resort	Total
No Recycling	$ 2,000	$ 1,000	$ 3,000
Recycling	$ 1,500	$ 1,800	$ 3,300

Total economic profit is highest when recycling production method is used.

Suppose, the resort has the property right to the lake. That is the resort has the right to a clean lake. In this case assuming the two forms can bargain at no cost, the chemical plant will use the recycling method and will pay the resort $ 0 per week.

Now, suppose the chemical plant 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 chemical plant will use the recycling method and the resort will pay the chemical plant between $ 500 to $ 800.

The chemical plant will make most economic profit when it has the property rights to pollute the lake.

No matter who so ever has the property rights that is resort or chemical plant the social outcome will remain the same. Therefore, as per the coase theorem the given statement is false.