Question

Consider a lake found in the village of Leduc, and then answer the questions that follow.

The village has a resort whose visitors use the lake for recreation. The village also has a chemical plant that dumps industrial waste into the lake. This pollutes the lake and makes it a less desirable vacation destination. That is, the chemical plant's waste decreases the resort's economic profit.

  

Suppose that the chemical plant 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 chemical plant uses the recycling method, then the chemical plant's economic profit is $2,200 per week, and the resort's economic profit is $3,200 per week. If the chemical plant does not use the recycling method, then the chemical plant's economic profit is $3,000 per week, and the resort's economic profit is $2,000 per week. These figures are summarized in the following table.

Complete the following table by computing the total profit (the chemical plant's economic profit and the resort's economic profit combined) with and without recycling.

Action	Profit
	Chemical Plant	Resort	Total
	(Dollars)	(Dollars)	(Dollars)
No Recycling	3,000	2,000
Recycling	2,200	3,200

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

When the chemical plant uses the recycling method, the resort earns $3,200−$2,000=$1,200$3,200−$2,000=$1,200 more per week than it does with no recycling. Therefore, the resort should be willing to pay up to $1,200 per week for the chemical plant to recycle water. However, the recycling method decreases the chemical plant's economic profit by $3,000−$2,200=$800$3,000−$2,200=$800 per week. Therefore, the chemical plant should be willing to use the recycling method if it is compensated with at least $800 per week.

Suppose the resort has the property rights to the lake. That is, the resort has the right to a clean (unpolluted) lake. In this case, assuming the two firms can bargain at no cost, the chemical plant will   the recycling method and will pay the resort   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   the recycling method, and the resort will pay the chemical plant   per week.

The chemical plant will make the most economic profit when   .

True or False: The chemical plant will use the recycling method, regardless of who has the property rights.

True

False

Answer 1

		Profit
Action	Chemical plant (dollars)	Resort (dollars)	Total (Dollars)
No recycling	3000	2000	(3000+2000)=5000
Recycling	2200	3200	(2200+3200)=5400

When the recycling method is not used. total profit =$ 5000. And when recycling method is used ,total profit = $5400. This implies that when recycling method is used ,total profit is more by $400 than without recycling.

Hence, Total profit is highest when recycling production method is used.

Suppose the resort has the property rights to lake.That is, the resort has the right to clean lake. In this case, assuming the two firms can bargain at no cost, the chemical plant use the recycling method and will pay the resort $0 per week.

Because The recycling method decreases the chemical plant's profit by $800 per week. Therefore,the chemical plant is willing to pay the resort up to $800 per week to be allowed not to use the recycling method. But when chemical plant doesn't use the recycling method ,then the resort would earn $ 1200 less per week. Therefore, resort would require atleast $1200 per week to allow the chemical plant to pollute the lake by not using recycling method. Even if the chemical plant is offered to pay $800 per week, the resort would not consider allowing the pollution ,because a clean lake is worth $1200 per week to the resort. And because the resort own the right to clean lake, the chemical plant's only choice is to use the recycling method . And because the lake remains clean , so the chemical plant doesn't need to pay any money to the resort.

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 the chemical plant will use the recycling method and the resort will pay the chemical plant between $800 and $1200 per week.

Because the recycling method increases the resort's profit by $1200 per week . Therefore, resort is willing to pay the chemical plant upto $1200 per week to use the recycling method. But when the chemical plant uses the recycling method ,it earns $800 less per week. Therefore,the chemical plant will require at least $800 per week to use the recycling method.

The chemical plant will make the most economic profit when the chemical plant has the property right to pollute the lake.

TRUE the chemical plant will use the recycling method , regardless of who has the property rights.