B. The effects of property rights on achieving efciency Consider a lake found in the town of Center Barn stead, and then answer the questions that follow. The town has a resort whose visitors use the lake for recreation. The town 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 resort's economic prot. 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 resort would no longer be affected. If the research lab uses the recycling method, then the research lah's economic prot is $2,200 per week, and the resort's economic prot is $2,600 per week. If the research lab does not use the recycling method, then the research lab's economic prot is $2,900 per week, and the resort's economic profit is $1,400 per week. These gures are summarized in the following table. Complete the following table by computing the total prot {the research iao's economic profit and the resort's economic prot combined) with and without recycling. Prot Research Lab Resort Total Action { Dollars ,1 (Dollars) (Dollars) No Recycling 2,900 1,400 \\:| Recycling 2,200 2,500 \\:| Total economic profit is highest when the recycling production method is V . when the research lab uses the recycling method, the resort earns $2,600 - $1,400 = $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 research lab to recycle water. However, the recycling method decreases the research lab's economic prot by $2,900 $2,200 = $"l00 per week. Therefore, the research lab should be willing to use the recycling method if it is compensated with at least $700 per week. Suppose the resort has the property rights to the lake. That is, the resort has the right to a clean (unpolluted) lake. In this case, assuming the two rms can bargain at no cost, the research lab will V the recycling method and will pay the resort V 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 rms can bargain at no cost, the research lab will V the recycling method, and the resort will pay the research lab V per week. The resort will make the most economic prot when V . True or False: The research lab will use the recycling method, regardless of who has the property rights. 0 True 0 False 3. The effect of negative externalities on the optimal quantityof consumption Consider the market for paper. Suppose that a paper factory dumps toxic waste into a nearby river, creating a negative externality for those living downstream from the factory. Producing an additional ton of paper imposes a constant external cost of $180 per ton. The following graph shows the demand (private value) curve and the supply (private cost) curve for paper. Use the purple points (diamond symbol) to plot the social cost curve when the external cost is $180 per ton. 900 810 Social Cost 720 O 630 O 540 O Supply Private Cost) PRICE (Dollars per ton of paper) 450 360 Demand 270 (Private Value) 180 90 2 3 5 6 QUANTITY (Tons of paper) The market equilibrium quantity is tons of paper, but the socially optimal quantity of paper production is tons. To create an incentive for the firm to produce the socially optimal quantity of paper, the government could impose a of $ per ton of paper