5. The effects of property rights on achieving efficiency Consider a lake found

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 research lab that dumps industrial waste into the lake. This pollutes the lake and makes it a less desirable vacation destination. That is, the research lab's waste decreases the hiking lodge's economic prolit Suppose that the research lab 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. I the research lab uses the recycling method, then the research lab's economic profit is si,800 per week, and the hiking lodge's economic profit is $2,800 per week. If the research lab does not use the recycling method then the research lab's economic profit is $2,300 per week, and the hiking lodge's economic profit is $2,000 per week. These figures are summarized

Explanation / Answer

Profit is higher when recycling method is used.

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 chemical plant will Use the recycling method and will pay the hiking lodge $0 per week.

Now, suppose the chemical plant 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 chemical plant will use the recycling method, and the hiking lodge will pay the chemical plant between $800 and $1,200 per week.

The chemical plant will make the most economic profit when the hiking lodge has property rights to a clean lake.

The statement is false.

Chemical Plant Hiking Lodge Total No recycling 2300 1600 3900 Recycling 1500 2800 4300

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