# Consider a lake found in the town of Center Barnstead, and then answer the questions that...

###### Question:

Consider a lake found in the town of Center Barnstead, and then answer the questions that follow. The town has a resort whose visitors use the lake for recreation. The town also has a tannery that dumps industrial waste into the lake. This pollutes the lake and makes it a less desirable vacation destination. That is, the tannery's waste decreases the resort's economic profit. Suppose that the tannery 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 tannery uses the recycling method, then the tannery's economic profit is $2,000 per week, and the resort's economic profit is$2,900 per week. If the tannery does not use the recycling method, then the tannery's economic profit is $2,700 per week, and the resort's economic profit is$1,900 per week. These figures are summarized in the following table. Complete the following table by computing the total profit (the tannery's economic profit and the resort's economic profit combined) with and without recycling. Total (Dollars) Action No Recycling Recycling Profit Resort (Dollars) 1,900 2,900 Tannery (Dollars) 2,700 2,000 Total economic profit is highest when the recycling production method is
When the tannery uses the recycling method, the resort earns $2,900 -$1,900 = $1,000 more per week than it does with no recycling. Therefore, the resort should be willing to pay up to$1,000 per week for the tannery to recycle water. However, the recycling method decreases the tannery's economic profit by $2,700 –$2,000 = $700 per week. Therefore, the tannery should be willing to use the recycling method if it is compensated with at least$700 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 tannery will the recycling method and will pay the resort per week. Now, suppose the tannery 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 tannery will the recycling method, and the resort will pay the tannery per week. The resort will make the most economic profit when True or False: The lake will remain polluted, regardless of who has the property rights. O True O False

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