8. The effects of property rights on achieving efficiencyConsider 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 fish cannery that dumps industrial waste into the river. This pollutes the river and makes it a less desirable vacation destination. That is, the fish cannery's waste decreases the resort's economic profit. Suppose that the fish cannery 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 fish cannery uses the recycling method, then the fish cannery's economic profit is $2,200 per week, and the resort's economic profit is $3,200 per week. If the fish cannery does not use the recycling method, then the fish cannery's economic profit is $3,000 per week, and the resort's economic profit is $2,000 per week. These figures are summarized in the following table. (the rest of the question and table is in the screenshot) Complete the following table by computing the total profit (the fish cannery's economic profit and the resort's economic profit combined) with andwithout recycling.ProfitFish CanneryResortTotalAction(Dollars)(Dollars)(Dollars)No Recycling3,0002,000Recycling2,2003,200Total economic profit is highest when the recycling production method isWhen the fish cannery uses the recycling method, the resort earns $3,200 – $2,000 = $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 fish cannery to recycle water. However, the recycling method decreasesthe fish cannery's economic profit by $3,000 – $2,200 = $800 per week. Therefore, the fish cannery should be willing to use the recycling method if itis 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 twofirms can bargain at no cost, the fish cannery willthe recycling method and will pay the resortperweek.Now, suppose the fish cannery has the property rights to the river, including the right to pollute it. In this case, assuming the two firms can bargain atno cost, the fish cannery willthe recycling method, and the resort will pay the fish canneryper week,The fish cannery will make the most economic profit whenTrue or False: The fish cannery will use the recycling method, regardless of who has the property rights.O TrueO False

Profit Action Fish Cannery ($) Resort ($) Total ($) No recycling 3000 2000…

Answered: Consider a river found in the city of…

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter13: Positive Externalities And Public Goods

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8. The effects of property rights on achieving efficiency

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 fish cannery that dumps industrial waste into the river. This pollutes the river and makes it a less desirable vacation destination. That is, the fish cannery's waste decreases the resort's economic profit.

Suppose that the fish cannery 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 fish cannery uses the recycling method, then the fish cannery's economic profit is $2,200 per week, and the resort's economic profit is $3,200 per week. If the fish cannery does not use the recycling method, then the fish cannery's economic profit is $3,000 per week, and the resort's economic profit is $2,000 per week. These figures are summarized in the following table.

(the rest of the question and table is in the screenshot)

Complete the following table by computing the total profit (the fish cannery's economic profit and the resort's economic profit combined) with and
without recycling.
Profit
Fish Cannery
Resort
Total
Action
(Dollars)
(Dollars)
(Dollars)
No Recycling
3,000
2,000
Recycling
2,200
3,200
Total economic profit is highest when the recycling production method is
When the fish cannery uses the recycling method, the resort earns $3,200 – $2,000 = $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 fish cannery to recycle water. However, the recycling method decreases
the fish cannery's economic profit by $3,000 – $2,200 = $800 per week. Therefore, the fish cannery 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 fish cannery will
the recycling method and will pay the resort
per
week.
Now, suppose the fish cannery 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 fish cannery will
the recycling method, and the resort will pay the fish cannery
per week,
The fish cannery will make the most economic profit when
True or False: The fish cannery will use the recycling method, regardless of who has the property rights.
O True
O False

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