Homework (Ch 10)8. The effects of property rights on achieving efficiencyConsider a lake found in the town of Center Barnstead, and then answer the questions that follow.The town has a hiking lodge whose visitors use the lake forrecreation. The town also has a research lab that dumpsindustrial waste into the lake. This pollutes the lake andmakes it a less desirable vacation destination. That is, theresearch lab's waste decreases the hiking lodge's economicprofit.Suppose that the research lab could use a different production method that involves recycling water. This would reduce the pollution in the lake tolevels safe for recreation, and the hiking lodge would no longer be affected. If the research lab uses the recycling method, then the research lab'seconomic profit is $1,500 per week, and the hiking lodge's economic profit is $1,800 per week. If the research lab does not use the recycling method,then the research lab's economic profit is $2,000 per week, and the hiking lodge's economic profit is $1,000 per week. These figures are summarizedin the following table. Homework (Ch 10)Q Search this coResearcn LaDNIKing LoageTotaiAction(Dollars)(Dollars)(Dollars)No Recycling2,0001,000У TolsRecycling1,5001,800Total economic profit is highest when the recycling production method isipsWhen the research lab uses the recycling method, the hiking lodge earns $1,800 – $1,000 = $800 more per week than it does with no recycling.Therefore, the hiking lodge should be willing to pay up to $800 per week for the research lab to recycle water. However, the recycling methodpsdecreases the research lab's economic profit by $2,000 – $1,500 = $500 per week. Therefore, the research lab should be willing to use the recyclingmethod if it is compensated with at least $500 per week.Suppose the hiking lodge has the property rights to the lake. That is, the hiking lodge has the right to a clean (unpolluted) lake. In this case, assumingthe two firms can bargain at no cost, the research lab willv the recycling method and will pay the hiking lodgev per week.Now, suppose the research lab has the property rights to the lake, including the right to pollute it. In this case, assuming the two firms can bargain atno cost, the research lab willv the recycling method, and the hiking lodge will pay the research labv perweek.The hiking lodge will make the most economic profit whenTrue or False: The lake will remain polluted, regardless of who has the property rights.O TrueO False

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Kesearcn LaD NIKing Loage Totai Action (Dollars) (Dollars) (Dollars) No Recycling 2,000 1,000 Recycling 1,500 1,800 Total economic profit is highest when the recycling production method is When the research lab uses the recycling method, the hiking lodge earns $1,800 – $1,000 = $800 more per week than it does with no recycling. Therefore, the hiking lodge should be willing to pay up to $800 per week for the research lab to recycle water. However, the recycling method decreases the research lab's economic profit by $2,000 – $1,500 = $500 per week. Therefore, the research lab should be willing to use the recycling method if it is compensated with at least $500 per week. Suppose the hiking lodge has the property rights to the lake. That is, the hiking lodge has the right to a clean (unpolluted) lake. In this case, assuming the two firms can bargain at no cost, the research lab will v the recycling method and will pay the hiking lodge per week.

Kesearcn LaD NIKing Loage Totai Action (Dollars) (Dollars) (Dollars) No Recycling 2,000 1,000 Recycling 1,500 1,800 Total economic profit is highest when the recycling production method is When the research lab uses the recycling method, the hiking lodge earns $1,800 – $1,000 = $800 more per week than it does with no recycling. Therefore, the hiking lodge should be willing to pay up to $800 per week for the research lab to recycle water. However, the recycling method decreases the research lab's economic profit by $2,000 – $1,500 = $500 per week. Therefore, the research lab should be willing to use the recycling method if it is compensated with at least $500 per week. Suppose the hiking lodge has the property rights to the lake. That is, the hiking lodge has the right to a clean (unpolluted) lake. In this case, assuming the two firms can bargain at no cost, the research lab will v the recycling method and will pay the hiking lodge per week.

Principles of Microeconomics

7th Edition

ISBN:9781305156050

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter11: Public Goods And Common Resources

Section: Chapter Questions

Problem 6PA

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