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 ketchup factory that clumps industrial waste into the lake. This pollutes the lake and makes it a less desirable vacation destination. That is, the ketchup factory's waste decreases the kayak rental's economic profit. Suppose that the ketchup factory 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 ketchup factory uses the recycling method, then the ketchup factory's economic profit is $1,800 per week, and the kayak rental's economic prot is $2,600 per week. If the ketchup factory does not use the recycling method, then the ketchup factory's economic prot is $2,500 per week, and the kayak rental's economic prot is $1,500 per week. These gures are summarized in the following table. Complete the following table by computing the total prot (the ketchup factory's economic prot and the kayak rental/'5 economic prot combined) with and without recycling. Profit 7 7 Ketchup Factory Kayak Rental Total Action (Dollars) (Dollars) (Dollars) No Recycling 2,500 1,500 Recycling 1,800 2,600 Total economic prot is highest when the recycling production method is V . When the ketchup factory uses the recycling method, the kayak rental earns $2,600 7 $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 ketchup factory to recycle water. However, the recycling method decreases the ketchup factory's economic profit by $2,500 7 $1,800 : $7UU per week. Therefore, the ketchup factory 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 clean (unpolluted) lake. In this case, assuming the two rms can bargain at no cost, the ketchup factory will V the recycling method and will pay the kayak rental V per week, Now, suppose the ketchup factory 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 ketchup factory will V the recycling method, and the kayak rental will pay the ketchup ctory V per week. The ketchup factory will make the most economic prot when V . True or False: The ketchup factory will use the recycling method, regardless of who has the property rights. 0 True 0 False
