The town has a kayak rental and visitors use the lake for recreation. The town also has a chemical lab that dumps industrial waste into the lake. This pollutes the lake and makes it a less desirable vacation destination. That is, the chemical lab's waste decreases the kayak rental's economic profit. Suppose that the chemical 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 kayak rental would no longer be affected. If the chemical lab uses the recycling method, then the
The town has a kayak rental and visitors use the lake for recreation. The town also has a chemical lab that dumps industrial waste into the lake. This pollutes the lake and makes it a less desirable vacation destination. That is, the chemical lab's waste decreases the kayak rental's economic profit.
Suppose that the chemical 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 kayak rental would no longer be affected. If the chemical lab uses the recycling method, then the chemical lab's economic profit is $900 per week, and the kayak rental's economic profit is $2,600 per week. If the chemical lab does not use the recycling method, then the chemical lab's economic profit is $1,600 per week, and the kayak rental'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 chemical lab's economic profit and the kayak rental's economic profit combined) with and without recycling.
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|
Profit |
|||
| Action | Chemical Lab |
Kayak Rental |
Total |
|
|
(Dollars) |
(Dollars) |
(Dollars) |
(Dollars) |
|
|
No Recycling |
1600 |
1500 |
??? |
|
|
Recycling |
900 |
2600 |
??? |
Total economic profit is highest when the recycling production method is(not used, used) .
When the chemical lab uses the recycling method, the kayak rental earns $2,600−$1,500=$1,100$2,600−$1,500=$1,100 more per week than it does with no recycling. Therefore, the kayak rental should be willing to pay up to $1,100 per week for the chemical lab to recycle water. However, the recycling method decreases the chemical lab's economic profit by $1,600−$900=$700$1,600−$900=$700 per week. Therefore, the chemical lab should be willing to use the recycling method if it is compensated with at least $700 per week.
Suppose the kayak rental has the property rights to the lake. That is, the kayak rental has the right to a clean (unpolluted) lake. In this case, assuming the two firms can bargain at no cost, the chemical lab will (use, not use) the recycling method and will pay the kayak rental ($0, between $0 and $400, between $400 and $700, or between $700 and $1000) per week.
Now, suppose the chemical lab 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 lab will (use, not use) the recycling method, and the kayak rental will pay the chemical lab($0, between $0 and $400, between $400 and $700, or between $700 and $1000) per week.
The kayak rental will make the most economic profit when (it has property rights to a clean lake, the chemical lab has property rights to pollute the lake).
True or False: The chemical lab will use the recycling method only if the kayak rental has the property rights.
-True
-False
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