Suppose that the tannery could use a different production method that involves r

Question

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. 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 Total Action (Dollars Dollars) (Dollars) No Recycling 2,300 1,600 Recycling 1,500 2,800 Total economic profit is highest when the recycling production method is When the tannery uses the recycling method, the hiking lodge earns $2,800-$1,600 $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 week for the tannery to recycle water. However, the recycling method decreases the tannery's economic profit by $2.300-$1,500= $800 per week. Therefore, the tannery should be willing to use the recycling method if it is compensated with at least $800 per week.

Explanation / Answer

Following is the complete table -

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

Suppose, the hiking lodge has the property rights to the river. That is, the hiking lodge has the right to a clean (unpolluted) river. In this case, assuming the two firms can bargain at no cost, the tannery will use the recycling method and will pay the hiking lodge $0 per week.

Now, suppose the tannery has the property rights to the river, including the right to pollute it. In this case, assuming two firms can bargain at no cost, the tannery will use the recycling method and the hiking lodge will pay the tannery between $800 and $1,200 per week.

The hiking lodge will make most economic profit when it has the property right to river.

If adequately compensated then tannery can use the recycling method even if it has the property rights.

So, it is not correct to say that the tannery will use the recycling method only if hiking lodge has the property rights.

Thus, the given statement is False.

Action Tannery Hiking Lodge Total No Recycling 2,300 1,600 3,900 Recycling 1,500 2,800 4,300

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