Question

5. 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 hiking lodge 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 hiking lodge's economic profit could use a different production method that involves recycling water. This would reduce the polilution in the lake to levels safe for recreation, and the hiking lodge would no longer be affected. If the tannery uses the recycling method, s2,000 per week, and the hiking lodge's economic profit is s2,100 per week. If the tannery does not use the recycling method, then the tannery economic profit is $2,700 per week, and the hiking lodge's economic profit is s900 per week. These figures are summarized in the 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. Profit Homework: Market Failure: Externalities, Public Goods, and Asymmetric Information (Ch 30) 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 Profit Tannery Hiking Lodge (Dollars) (Dollars) Total Action (Dollars) No Recycling 2,700 Recycling 2,000 900 2,100 Total economic profit is highest when the recycling production method is When the tannery uses the recycling method, the hiking lodge earns $2.1$1,200 more per week than it does with no recycling. Therefore, the hiking lodge should be willing to pay up to $1,200 per wee used nnery to recycle water. However, the recycling method decreases the tannery's economic profit by $2.700-$2.000 = S700 per week. The erremeannery should be willing to use the recycling method if it is compensated with at least $700 per week Suppose the hiking lodge has the property rights to the lake. That is, the hiking lodge has the right to a clean (unpolluted) lake. In this case, assuming the two firms can bargain at no cost, the tannery illthe recycling method and will pay the hiking lodge per week. Now, suppose the tannery 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 tannery will per week. the recycling method, and the hiking lodge will pay the tannery The tannery will make the most economic profit when True or False: The tannery will use the recycling method only if the hiking lodge has the property rights True . Mind Tap-Cen...htm Homework: Market Failure: Externalities, Public Goods, and Asymmetric Information (Ch 30) without recycling Profit Tannery Hiking LodgeTotal Action (Dollars) (Dollars) No Recycling 2,700 (Dollars) 900 Recycling 2,000 2,100 Total economic profit is highest when the recycling production method is When the tannery uses the recycing Therefore, the hiking lodge should be willing to pay up to $1,200 per week for the tannery to recycle water. However, the the tannery's economic pront by $2.700-S2000 = $700 per week. Therefore, the tannery should be compensated with at least $700 per week. method, the hiking lodge earns $2,100-$900 $1.200 more per week than it does with no recycling. recydling method decreases willing to use the recycing method if t s Suppose the hiking lodge has the property rights to the lake. That is, the hiking lodge has the right to a clean (unpoliuted) lake. In this case, assuming the two firms can bargain at no cost, the tannery will. ▼ the recycling method and win pay-hiking odpe . per week. not use Now, suppose the tannery has the property rights to the lake, iuse e right to pollute it. In this case, assuming the two firms can bargain at no cost, the tannery wil the recyding method, and tr m gdge wa' pay the tannery The tannery will make the most economic profit when True or False: The tannery will use the recycling method only if the hiking lodge has the property rights. per week. True O False Homework: Market Failure: Externalities, Public Goods, and Asymmetric Information (Ch 30) without recydling. Profit Tannery Hiking Lodge Total Action (Dollars) (Dollars) (Dollars) No Recycling 2,700 Recydling 2,000 900 2,100 Total economic profit is highest when the recycdling production method isRLY When the tannery uses the recycling method, the hiking lodge earns $2,100-$900-$1.200 Therefore, the hiking lodge should be willing to pay up to $1,200 per week for the tannery to recycle water. However, the recycling method decreases the tannery's economie profit by $2,700 - $2.000 $700 per week. Therefore, the tannery should be willing to use the recycling method it it is compensated with at least $700 per week. more per week than it does with no recycling Suppose the hiking lodge has the property rights to the lake. That is, the hiking lodge has the right to a clean (unpolluted) lake. In this case, assuming the two firms can bargain at no cost, the tannery lthe recycling method and will pay the hiking lodge per week. so the property rights to the lake, including the right to pollute it. In this case, assuming the two firms can bargain at no between $0 and $500 the recycling method, and the hiking lodge will pay the tannery between $500 and $700 st economic profit when between $700 and $1,200 per week. or or ranseuHecaery wil use the recycling method only if the hiking lodge has the property rights. True O False Recyding2,000 2,100 Total economic profit is highest when the recycling production method is When the tannery uses the recycling method, the hiking lodge earns $2.100-$900 $1,200 more per week than it does Therefore, the hiking lodge should be willing to pay up to $1,200 per week for the tannery to recycle water. However, the n the tannery's economic profit by $2,700-$2,000 $700 per week. Therefore, the tannery should be willing to use the red compensated with at least $700 per week. Suppose the hiking lodge has the property rights to the lake. That is, the hiking lodge has the right to a clean (unpolluted) I assuming the two firms can bargain at no cost, the tannery will recycling method and will pay the hikingl Yper week Now, suppose the tannery has the property rights to the lake, including the right to pollute it. In this case, assuming the tw cost, the tannery will the recycling method, and the hiking lodge will pay the tannery not use The tannery will mak economic profit when use True or False: The tarmerywir use the recycling method only if the hiking lodge has the property rights. True @ False 0 $1,200 more per week than it does with no recycling. tannery to recycle water. However, the recycling method decreases e tannery should be willing to use the recycling method if it is dge has the right to a clean (unpolluted) lake. In this case, recycling method and will pay the hiking lodge to pollute it. In this case, assuming the two firms can bargain at no ill pay the tannery per week. $o between $0 and $500 between $500 and $700 between $700 and $1,200 has the property r oduction method is king lodge earns $2,100-$900 $1,200 more per week than it do up to $1,200 per week for the tannery to recycle water. However, th $700 per week. Therefore, the tannery should be willing to use the o the lake. That is, the hiking lodge has the right to a clean (unpollutea e tannery will the recycling method and will pay the hiking ts to the lake, including the right to pollute it. In this case, assuming the tv method, and the hiking lodge will pay the tannery t when it has property rights to pollute the lake ng meth the hiking lodge has property rights to a clean lake

Answer 1

1. used.(4100 > 3600)

2. use the recycling method(as not using the method, makes him liable for damages of atleast $1200 towards Hiking lodge. If it uses the RM, it need not give anything but will rather recieve $700 for cleanup costs.)

3. $0 (explanation above)

4. will not use recycling method as his own payoff is maximized. ($2700, no cleanup costs incurred)

5. $0

6. it has property right to pollute the lake

7. True.(Explanation above)