Question

8. 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 $2,500 per week, and the resort's economic profit is $2,500 per week. If the research lab does not use the recycling method, then the research lab's economic profit is $2,800 per week, and the resort's economic profit is $1,700 per week. These figures are summarized in the following table

Answer 1

	Profit
Action	Research Lab (Dollars)	Resort(Dollars)	Total (Dollars)
No recycling	2800	1700	4500
recycling	2500	2500	5000

Total economic profit is highest when the recycling production method is Recycling (Since 5000>4500)

Assuming the resort has the property rights to lake. If the two firms can bargain at no cost, the research lab will choose/accept the recycling method and pay the resort 0 per week.

(Since the research lab does not have the right to pollute the lake and thus is not doing it, it does not need to pay the resort anything,If the question was framed as what would the reseach lab be willing to accept for a clean lake, it would be 300$ as the paragraph above says)

Assuming the research lab has the right to pollute the lake and the 2 firms can bargain at no cost,the research lab will still choose/accept the recycling method, and the resort will pay the research lab upto 800$ per week.

The resort will make the most economic profit(2500) when the resort has the rights to a clean lake.

True. The research lab will choose the recycling method regardless of who has property rights as they can bargain at no cost and the recycling method has a higher overall profit,they can always find a bargain such that both either have the same or more profits compared to when the research lab was not recycling.

Hope it's clear. Do ask for any clarifications required.