Question

8. The effects of property rights on achieving efficiency Consider a river found in the city of Philadelphia, and then answer the questions that follow. The city has a hiking lodge whose visitors use the river for recreation. The city also has a tannery that dumps industrial waste into the river. This pollutes the river and makes it a less desirable vacation destination. That is, the tannery's waste decreases the hiking lodge's economic profit. Suppose that the tannery could use a different production method that involves recycling water. This would reduce the pollution in the river to levels safe for recreation, and the hiking lodge would no longer be affected. If the tannery uses the recycling method, then the tannery's economic profit is $1,500 per week, and the hiking lodge's economic profit is $2,800 per week. If the tannery does not use the recycling method, then the tannery's economic profit is $2,300 per week, and the hiking lodge's economic profit is $1,600 per week. These figures are summarized in the following table.

Answer 1

No recycling : total profit = 3,900

Recycling : total profit = 3,300

Total economic profit is highest.......... Used

Suppose the hiking lodge has the highest........... Use.......... $ 0 per week

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

The Tannery............ It has the right to pollute the lake

The tannery will use the recycling........ False

Answer 2

No recycling: total profit: 3,900

Recycling: total profit: 4,300

Total economic profit is highest when... used

hiking lodge .... USE..... pay $0

Chemical Plant... USE... pay 800-1200

Hiking lodge makes more profit.... when it has the property rights to the lake

T/F: true