Question

7. The effects of property rights on achieving efficiency Consider a lake found in the village of Sturbridge, and then answer the questions that follow. The village has a resort whose visitors use the lake for recreation. The village also has a tannery that dumps industrial waste into the lake. This pollutes the lake and makes it a less desirable vacation destination. That is, the tannery's waste decreases the resort's economic profit. Suppose that the tannery 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 tannery uses the recycling method, then the tannery's economic profit is $2,200 per week, and the resort's economic profit is $3,200 per week. If the tannery does not use the recycling method, then the tannery's economic profit is $3,000 per week, and the resort's economic profit is $2,000 per week. These figures are summarized in the following table. Complete the following table by computing the total profit (the tannery's economic profit and the resort's economic profit combined) with and without recycling.

Answer 1

No recycling : total = 5,000

Recycling : total = 5,400

Total economic profit is maximized.......... Used

Suppose the resort has the................... Use........... $ 0 per week

Now suppose the Tannery.............. Use.......... between $ 800 and $ 1200 per week

The Tannery will make the most........... It has the right to pollute the lake

The lake will remain......... False