Question

Consider a river found in the city of Philadelphia, and then answer the questions that follow.

The city has a resort whose visitors use the river for recreation. The city also has a chemical plant that dumps industrial waste into the river. This pollutes the river 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 river 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 $1,500 per week, and the resort's economic profit is $2,800 per week. If the chemical plant does not use the recycling method, then the chemical plant's economic profit is $2,300 per week, and the resort'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 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	2,300	1,600
Recycling	1,500	2,800

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

When the chemical plant uses the recycling method, the resort earns $2,800−$1,600=$1,200$2,800−$1,600=$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 $2,300−$1,500=$800$2,300−$1,500=$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 river. That is, the resort has the right to a clean (unpolluted) river. 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 river, 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 only if the resort has the property rights.

True

False

Answer 1