Question

In rural Appalachia, many people live in small communities of modest-sized houses built on the narrow flood plains of streams. Surrounding these valley communities are steep, wooded mountainsides. Logging companies operate on these mountainsides. Occasionally the small streams flood, causing significant property damage in the communities. Many people who live in these rural communities believe that the activities of the logging companies on the mountains (building dirt roads and removing trees) have increased the amount of water that runs off the mountains into the streams after a storm, and has thus increased the frequency and severity of damaging floods. This has led some homeowners to sue logging companies for the cost of replacing or repairing houses and other possessions damaged in the floods. Suppose that in one of the lawsuits the State Supreme Court assigns liability to the logging company for temporary damages – they must pay the plaintiff for damages caused in the flood that led to the lawsuit, and are still liable for any damages caused by flooding in the future. Another logging company (Logging Company B), which operates in a valley located in another part of the state where there has been no flooding recently, shuts down its operation. A third logging company (Logging Company C) does not shut down, but is observed to be buying the homes and land of those who live in the valley. In an essay that is no more than three paragraphs, and no longer than 1.5 typed, double spaced, pages in 12 point font, offer an explanation of why logging companies B and C reacted as they did to the decision in the law suit, and why their reactions were different. Your proposed explanation should be based on the economic ideas we have been discussing in class.

Answer 1

Answer- Logging companies are one which are involved in the cutting of trees,and trade in the wood and timber products obtained from the trees.The huge profits involved in this trade sometimes makes the companies tempt them to generate revenue as much as possible and which results in companies  taking  wrong decisions and irrespective of whether their operations will bring legal proceedings in the future,they tend to neglect the course of nature and the legal laws.Like as we can see in the case of rural Appalachia where the small streams were flooded and created problems for their local residents,since it happened after the operations of logging companies in the village,they were being allegedly responsible for this.Due to the floods in small streams and damage of properties and homes of the local residents of rural Appalachia,many logging companies were being sued by the local residents for the cost of damages,and after the legal disputes involved,State supreme court held them accountable for the damage.From the economical point of view this has been a huge loss for the logging companies that were operating there.After this,two companies B and C operating in different states(other than which consists of rural appalachia) have taken different decisions on their operation.

Logging Company B decided to shut down their operations after the lawsuit,since they have estimated their economic losses if ever they will get into a legal disputes.A legal dispute not just leads to revenue loss but also a loss of time,manpower,.etc.From the economical point of view, it is not advisable to invest in if the estimated loss(taking all the estimated factors) is greater than the profit arising from the investment.In this case,the company should have tried to shift the investment from trading in wooden products  to any other business that resembles and demands almost same assets as that of wooden products.But instead of shifting the business they shut down their operations which is not economically feasible either.But comparative to their assets,it should have been way more risky to invest more on any other business.

Logging Company C on the other hand continued their operations,and have estimated their economic losses inolved if ever they will get into the legal disputes.They are being observed to buying homes and lands of people living in the valley, and it seems that they after calculating the economical losses,have shifted their business interests to real estate or a similar business instead of shutting down(which should not have been economically feasible either).The reactions of both the companies are different and have taken their respective decisions in wake of the lawsuits filed,and the loss suffered by other logging companies in the rural appalachia.Both reacted differently on the situations because both working assets and economical estimates should have been different.