Question

The city has a campground whose visitors use the river for recreation. The city also has a research lab that dumps industrial waste into the river. This pollutes the river and makes it a less desirable vacation destination. That is, the research lab's waste decreases the campground'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 river 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 economic profit is $2,400 per week, and the campground's economic profit is $2,000 per week. If the research lab does not use the recycling method, then the research lab's economic profit is $2,700 per week, and the campground's economic profit is $1,200 per week. These figures are summarized in the following table. Complete the following table by computing the total profit (the research lab's economic profit and the campground's economic profit combined with and without recycling. Total (Dollars) Action No Recycling Recycling Profit Campground (Dollars) 1,200 2,000 Research Lab (Dollars) 2,700 2,400 Total economic profit is highest when the recycling production method is When the research lab uses the recycling method, the campground earns $2,000 - $1,200 $800 more per week than it does with no recycling. Therefore, the campground should be willing to pay up to $800 per week for the research lab to recycle water. However, the recycling method decreases the research lab's economic profit by $2,700 - $2,400 = $300 per week. Therefore, the research lab should be willing to use the recycling method if it is compensated with at least $300 per week. Suppose the campground has the property rights to the river. That is, the campground has the right to a clean (unpolluted) river. 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.

Answer 1

No recycling : total = 3,900

Recycling : total = 4,400

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

Suppose the campground............. Use......... $ 0 per week

Now suppose the research lab........ Use....... Between $ 300 and $ 800

The research lab will make the most economic......... It has the right to pollute the lake

The river will remain........... False