8. The effects of property rights on achieving efficiency

Consider a lake found in the village of Sturbridge, and then answer the questions that follow.

The village has a hiking lodge whose visitors use the lake for recreation. The village also has a research lab that dumps industrial waste into the lake. This pollutes the lake and makes it a less desirable vacation destination. That is, the research lab's waste decreases the hiking lodge's economic profit.

Suppose that the research 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 hiking lodge would no longer be affected. If the research lab uses the recycling method, then the research lab's economic profit is $1,500 per week, and the hiking lodge's economic profit is $2,800 per week. If the research lab does not use the recycling method, then the research lab's economic profit is $2,300 per week, and the hiking lodge's economic profit is $1,600 per week. These figures are summarized in the following table.

Complete the following table by computing the total profit (the research lab's economic profit and the hiking lodge's economic profit combined) with and without recycling.

Action	Profit
	Research Lab	Hiking Lodge	Total
	(Dollars)	(Dollars)	(Dollars)
No Recycling	2,300	1,600
Recycling	1,500	2,800

Total economic profit is highest when the recycling production method is .

When the research lab uses the recycling method, the hiking lodge earns $2,800$1,600=$1,200$2,800$1,600=$1,200 more per week than it does with no recycling. Therefore, the hiking lodge should be willing to pay up to $1,200 per week for the research lab to recycle water. However, the recycling method decreases the research lab's economic profit by $2,300$1,500=$800$2,300$1,500=$800 per week. Therefore, the research lab should be willing to use the recycling method if it is compensated with at least $800 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 the recycling method and will pay the hiking lodge 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 at no cost, the research lab will the recycling method, and the hiking lodge will pay the research lab per week.

The research lab will make the most economic profit when .

True or False: The research lab will use the recycling method only if the hiking lodge has the property rights.

True

False