8. The effects of property rights on achieving efficiency Consider a lake found in the town of Center Barnstead, and then answer the questions that follow. The town has a kayak rental whose visitors use the lake for recreation. The town also has a chemical lab that dumps industrial waste into the lake. This pollutes the lake and makes it a less desirable vacation destination. That is, the chemical lab's waste decreases the kayak rental's economic profit. Suppose that the chemical 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 kayak rental would no longer be affected. If the chemical lab uses the recycling method, then the chemical lab's economic profit is $900 per week, and the kayak rental's economic profit is $2,600 per week. If the chemical lab does not use the recycling method, in the following table. Complete the following table by computing the total pront (the chemical lab's economic profit and the kayak rental's economic profit combined) with and without recycling. Total economic profit is highest when the recycling production method is When the chemical lab uses the recycling method, the kayak rental earns $2,600$1,500=$1,100 more per week than it does with no recycling. Therefore, the kayak rental should be willing to pay up to $1,100 per week for the chemical lab to recycle water. However, the recycling method decreases the chemical lab's economic profit by $1,600$900=$700 per week. Therefore, the chemical tab should be willing to use the recycing method if it is compensated with at least $700 per week. Suppose the kayak rental has the property rights to the lake. That is, the kayak rental has the right to a clean (unpoliuted) lake: In this case, assuming the two firms can barsain at no cost, the chemical lab will rental the recycling method and will pay the kayak per week: Now, suppose the chemical lab has the property rights to the lake, including the right to pollute it. In this case, assuming the two firms can barain at no cost, the chemical lab will weck. the recycling method, and the kayak rental will pay the chemical lab The kayak rental will make the most economic profit when True or False: The chemical lab will use the recycling method, regardless of who has the property rights: True False 1. Externalities - Definition and examples An externality arises when a firm or person engages in an activity that affects the wellbeing of a third party, yet neither pays nor receives any compensation for that effect. If the impact on the third party is beneficial, it is called a externality. The following graph shows the demand and supply curves for a good with this type of externality. The dashed drop lines on the graph reflect the market equilibrium price and quantity for this good. Adjust one or both of the curves to reflect the presence of the externality. If the social cost of producing the good is not equal to the private cost, then you should drag the supply curve to reflect the social costs of producing the good; similarly, if the social value of producing the good is not equal to the private value, then you should drag the demand curve to reflect the social value of consuming the good. With this type of externality, in the absence of government intervention, the market equilibrium quantity produced will be socially optimal quantity. Which of the following generate the type of externality previously described? check all that apply. Maria has planted hundreds of flowers in her front yard, beautifying the neighborhood both for herself and for her neighbors. The local airport has doubled the number of runways, causing additional noise pollution for the surrounding residents. Your roommate Rajiv has bought a bird that keeps you up at night with its chirping. A leading software compony has decided to increase its research budget for inventing new open-source technologies. 9. Private solutions to correct for externalities Consider the following scenario: Suppose that a chicken farm uses a nearby stream to dispose of the wastes released by its chickens. These wastes flow downstream into a lake that has become thick with algae and polluted by the minerals in the waste matter. The local office of a nonprofit. environmental organization collects enough donations to fund a campaign to stop the farm's pollution. Which of the following private solutions resolving the externality of pollution took place in this scenario? Contracts Integration of different types of businesses through merger or acquisition Moral codes and social sanctions Charities Keep in mind that sometimes private solutions to externalities are not achieved. For instance, this could occur when communications barriers or social customs are important enough relative to the potential gains involved that. 8. The effects of property rights on achleving efficiency Consider a lake found in the town of Center Barnstead, and then answer the questions that follow. The town has a kayak rental whose visitors use the lake for recreation. The town also has a chemical lab that dumps industrial waste into the iake. This pollutes the lake and makes it a less desirable vacation destination. That is, the chemical lab's waste decreases the kayak rental's economic profitit Suppose that the chemical lab could use a different production method that involves recycling water. This would reduce the polfution in the take to levels safe for recreation, and the koyak rental woild no longer be affected. If the chemical lab uses the recycling method, then the chemical labis economic profit is $900 per week, and the kayak rental's economic pronit is $2,600 per week. If the chemical lab does not use the recycling method, then the chemical lab's economic profit is $1,600 per week, and the kayak rental's economic profic is $1, 500 per week. These figures are summarized in the following table. Complete the following table by compoting the total proft (the chemical lab's economic proft and the koyak rencar's economic profit combined) with and without recycling. Total cconomic profit is highest when the recycling production method is When the chemical lab uses the recycling method, the kayak rental earns $2,600$1,500=$1, 100 more per week than it does with no recycling. Therefore, the kayak rental should be willing to pay up to $1,100 per week for the chemical lab to recycle water. However, the recycling method decreases the chemical lab's economic profit by $1,600$900=$700 per week, Therefore, the chemical lab should be willing to use the recycling method if it is compensated with at least $700 per week. Suppose the kayak rental has the property rights to the lake. That is, the kayak rental has the right to a ciean (unpolluted) lake. In this case, assuming the two firms can bargain at no cost, the chemical lab will rental per weeki. the recycling method and will pay the kayak Now, suppose the chemical 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 chemical tab will week, the recycling method, and the kayak rental will pay the chemical lab. The kayak rental will make the most economic profit when True or False: The chemical lab will use the recyeling method, regardless of who has the property rights. True False