Question

13. 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 hiking lodge whose visitors use the lake for recreation. The town 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 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 lake 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 $2,000 per week, and the hiking lodge's economic profit is $1,800 per week. If the tannery does not use the recycling method, then the tannery's economic profit is $2,800 per week, and the hiking lodge's economic profit is $800 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 hiking lodge's economic profit combined) with and without recycling.

Answer 1

Total Profit ( no recycling)=2800+800=3600

Total Profit ( recycling)=2000+1800=3800

So , total profit ( recycling)> total profit ( no recycling)

So total economic profit is higher recycling production method is used.

Property right to hiking Lodge,

Tannrey will not used recycling method and pay hiking lodge between 800-1000. Per week.

Property right to Tannrey,

Tannrey will use recycling method and hiking will pay Tannrey between 800-1000 per week.

In case of hiking Lodge has property right, profit of Tannrey between 1800-2000

In case of Tannrey has property right, profit of Tannrey between 2800-3000.

Tannrey make most economic profit when it has the property to pollute.

False, If property right is given to anyone ,and firms can bargain at no cost, It will always leads to efficient outcome( coase theorm).So if property right is given to Tannrey ,then hiking Lodge will pay between 800-1000, to Tannrey to use recycling production method and lake will be clean.