8. The effects of property rights on achieving efficiency Consider a river found in the city of Pittsburgh, and then answer the questions that follow. The city has a boat tour whose visitors use the river for recreation. The city also has a ketchup factory that dumps industrial waste into the river. This pollutes the river and makes it a less desirable vacation destination. That is, the ketchup factory's waste decreases the boat tour's economic profit. Suppose that the ketchup factory 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 boat tour would no longer be affected. If the ketchup factory uses the recycling method, then the ketchup factory's economic profit is $1,000 per week, and the boat tour's economic profit is $2,600 per week. If the ketchup factory does not use the recycling method, then the ketchup factory's economic profit is $1,700 per week, and the boat tour's economic profit is $1,500 per week. These figures are summarized in the following table. Complete the following table by computing the total profit (the ketchup factory's economic profit and the boat tour's economic profit combined) with and without recycling. Action No Recycling Recycling Ketchup Factory (Dollars) 1,700 1,000 Profit Boat Tour (Dollars) 1,500 2,600 Total (Dollars) Total economic profit is highest when the recycling production method is
8. The effects of property rights on achieving efficiency Consider a river found in the city of Pittsburgh, and then answer the questions that follow. The city has a boat tour whose visitors use the river for recreation. The city also has a ketchup factory that dumps industrial waste into the river. This pollutes the river and makes it a less desirable vacation destination. That is, the ketchup factory's waste decreases the boat tour's economic profit. Suppose that the ketchup factory 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 boat tour would no longer be affected. If the ketchup factory uses the recycling method, then the ketchup factory's economic profit is $1,000 per week, and the boat tour's economic profit is $2,600 per week. If the ketchup factory does not use the recycling method, then the ketchup factory's economic profit is $1,700 per week, and the boat tour's economic profit is $1,500 per week. These figures are summarized in the following table. Complete the following table by computing the total profit (the ketchup factory's economic profit and the boat tour's economic profit combined) with and without recycling. Action No Recycling Recycling Ketchup Factory (Dollars) 1,700 1,000 Profit Boat Tour (Dollars) 1,500 2,600 Total (Dollars) Total economic profit is highest when the recycling production method is
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Note: The answer should be typed.
Transcribed Image Text:8. The effects of property rights on achieving efficiency
Consider a river found in the city of Pittsburgh, and then answer the questions that follow.
The city has a boat tour whose visitors use the river for
recreation. The city also has a ketchup factory that dumps
industrial waste into the river. This pollutes the river and
makes it a less desirable vacation destination. That is, the
ketchup factory's waste decreases the boat tour's economic
profit.
Suppose that the ketchup factory 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 boat tour would no longer be affected. If the ketchup factory uses the recycling method, then the ketchup factory's
economic profit is $1,000 per week, and the boat tour's economic profit is $2,600 per week. If the ketchup factory does not use the recycling method,
then the ketchup factory's economic profit is $1,700 per week, and the boat tour's economic profit is $1,500 per week. These figures are summarized
in the following table.
Complete the following table by computing the total profit (the ketchup factory's economic profit and the boat tour's economic profit combined) with
and without recycling.
Action
No Recycling
Recycling
Ketchup Factory
(Dollars)
1,700
1,000
Profit
Boat Tour
(Dollars)
1,500
2,500
Total
(Dollars)
Total economic profit is highest when the recycling production method is
Transcribed Image Text:When the ketchup factory uses the recycling method, the boat tour earns $2,600-$1,500 $1,100 more per week than it does with no recycling.
Therefore, the boat tour should be willing to pay up to $1,100 per week for the ketchup factory to recycle water. However, the recycling method
decreases the ketchup factory's economic profit by $1,700-$1,000 8700 per week. Therefore, the ketchup factory should be willing to use the
recycling method if it is compensated with at least $700 per week.
Suppose the boat tour has the property rights to the river. That is, the boat tour has the right to a clean (unpolluted) river. In this case, assuming the
two firms can bargain at no cost, the ketchup factory will
the recycling method and will pay the boat tour
per week.
Now, suppose the ketchup factory 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 ketchup factory will
the recycling method, and the boat tour will pay the ketchup factory
per week.
The ketchup factory will make the most economic profit when
True or False: The river will remain polluted, regardless of who has the property rights.
O True
O False
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