5 . The effects of property rights on achieving efficiency Consider a river found in the city of Whitehorse, and then answer the questions that follow. The city has a resort whose visitors use the river for recreation. The city also has a tannery that dumps industrial waste into the river. This pollutes the river 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 river 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 $1,800 per week, and the resort's economic profit is $2,800 per week. If the tannery does not use the recycling method, then the tannery's economic profit is $2,300 per week, and the resort's economic profit is $2,000 per week. These figures are summarized in the following table.Complete the following table by computing the total profit (the tannery's economic prot and the resort's economic prot combined) with and without recycling. Profit Tan nery Resort Total Action (Dollars) (Dollars) (Dollars) No Recycling 2,300 2,000 E Recycling 1,800 2,800 E Total economic prot is highest when the recycling production method is V . When the tannery uses the recycling method, the resort earns $2,800 $2,000 : $800 more per week than it does with no recycling. Therefore, the resort should be willing to pay up to $800 per week for the tannery to recycle water. However, the recycling method decreases the tannery's economic profit by $2,300 $1,800 : $500 per week. Therefore, the tannery should be willing to use the recycling method if it is compensated with at least $500 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 tannery will V the recycling method and will pay the resort V per week. Now, suppose the tannery has the property rights to the river, including the right to pollute it. In this case, assuming the two rms can bargain at no cost, the tannery will V the recycling method, and the resort will pay the tannery V per week. The resort will make the most economic profit when V . True or False: The tannery will use the recycling method, regardless of who has the property rights. O True 0 False 6 . Voluntary contributions toward a public good Raphael and Alex are considering contributing toward the creation of a water fountain. Each can choose whether to contribute $300 to the water fountain or to keep that $300 for a new suit. Since a water fountain is a public good, both Raphael and Alex Wlll benefit from any contributions made by the other person. Speofically, every dollar that either one of them contributes will bring each of them $0.90 of benefit. For example, if both Raphael and Alex choose to contribute, then a total of $600 would be contributed to the water fountain. So, Raphael and Alex would each receive $540 of benefit from the water fountain, and their combined benefit would be 51,080. This is shown in the upper left cell of the first table. Since a new suit is a private good, if Raphael chooses to spend $300 on a new suit, Raphael would get $300 of benefit from the new suit and Alex wouldn't receive an}.r benefit from Raphael's choice. If Raphael still spends $300 on a new suit and Alex chooses to contribute S300 to the water fountain, Raphael would still receive the $270 of benefit from Alex's generosity. In other words, if Raphael decides to keep the $300 for a new suit and Alex decides to contribute the $300 to the public project, then Raphael would receive a total benefit of $300 + $270 : $570, Alex would receive a total benefit of $270, and their combined benefit would be $840. This is shown in the lower left cell of the first table. Complete the following table, which shows the combined benefits of Raphael and Alex as previously described. Alex Contributes Doesn't contribute Contributes $1,080 $ Raphael Doesn't contribute $840 $ Of the four cells of the table, which gives the greatest combined benefits to Raphael and Alex? O When both Raphael and Alex contribute to the water fountain When Raphael contributes to the water fountain and Alex doesn't, or vice versa When neither Raphael nor Alex contributes to the water fountain Now, consider the incentive facing Raphael individually. The following table looks similar to the previous one, but this time, it is partially completed with the individual benefit data for Raphael. As shown previously, if both Raphael and Alex contribute to a public good, Raphael receives a benefit of $540. On the other hand, if Alex contributes to the water fountain and Raphael does not, Raphael receives a benefit of $570.Complete the right-hand column of the following table, which shows the individual benefits of Raphael. Hint: You are not required to consider the benefit of Alex. Alex Contribute Doesn't contribute Contribute $540, -- $ Raphael Doesn't contribute $570, -- If Alex decides to contribute to the water fountain, Raphael would maximize his benefit by choosing to the water fountain. On the other hand, if Alex decides not to contribute to the water fountain, Raphael would maximize his benefit by choosing to the water fountain. These results illustrate7 . Common resources and the Tragedy of the Commons Sean, Bob, and Eric are lumberjacks who live next to a forest that is open to logging; in other words, anyone is free to use the forest for logging. Assume that these men are the only three lumberjacks who log in this forest and that the forest is large enough for all three lumberjacks to log intensively at the same time. Each year, the lumberjacks choose independently how manyr acres of trees to cut down; specifically, they choose whether to log intensively (that is, to clearcut a section of the forest, which hurts the sustainability of the forest if enough people do it) or to log nonintensively (which does not hurt the sustainability of the forest). None of them has the ability to control how much the others log, and each lumberjack cares only about his own profitability and not about the state of the forest. Assume that as long as no more than one lumberjack logs intensively, there are enough trees to regrow the forest. However, if two or more log intensively, the forest will become useless in the future. Of course, logging intensively earns a lumberjack more money and greater profit because he can sell more trees. The forest is an example of V because the trees in the forest are V and V . Depending on whether Bob and Eric both choose to log either nonintensively or intensively, fill in Sean's profit-maximizing response in the following table, given Bob and Eric's actions. Bob and Eric's Actions Log Nonintensively Log Intensively Sean's Profit-Maximizing Response Which of the following solutions could ensure that the forest is sustainable in the long run, assuming that the regulation is enforceable? Check all that apply. Develop a program that entices more lumberjacks to move to the area. O Outlaw intensive logging. Convert the forest to private property, and allow the owner to sell logging rights