Question

The effects of property rights on achieving efficiency

5. 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 fish cannery that dumps industrial waste into the lake. This pollutes the lake and makes it a less desirable vacation destination. That is, the fish cannery's waste decreases the resort's economic profit. M Suppose that the fish cannery 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 fish cannery uses the recycling method, then the fish cannery's economic profit is $1,400 per week, and the resort's economic profit is $2,700 per week. If the fish cannery does not use the recycling method, then the fish cannery's economic profit is $2,200 per week, and the resort's economic profit is $1,500 per week. These figures are summarized in the following table.

Answer 1

Solution:-

Under No Recycling total profit = 2200 + 1500 = 2700

Under Recycling total profit = 1400 + 2700 = 4100

Total economic profit is highest when the recycling production method is used.

Suppose the resort has the property rights to the lake, In this case the fish cannery will use the recycling method and will pay the resort $0. Per week

Now, suppose the fish cannery has the property rights to the lake, including the right to pollute it. In this case, assuming the two firms can bargain at no cost, the fish cannery will use the recycling method, and will pay the resort $800 per week.

The fish cannery will make the most economic profit when it has the property rights to pollute the lake.

The statement is False.