Consider a river found in the city of Philadelphia, and then answer the questions that follow.

The city has a campground 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 campground'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 campground would no longer be affected. If the tannery uses the recycling method, then the tannery's economic profit is $2,400 per week, and the campground's economic profit is $2,000 per week. If the tannery does not use the recycling method, then the tannery's economic profit is $2,700 per week, and the campground's economic profit is $1,200 per week. These figures are summarized in the following table.

Complete the following table by computing the total profit (the tannery's economic profit and the campground's economic profit combined) with and without recycling.

ActionProfit

TanneryCampgroundTotal(Dollars)(Dollars)(Dollars)No Recycling2,7001,200Recycling2,4002,000

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

When the tannery uses the recycling method, the campground earns$2,000$1,200=$800

$2,000$1,200=$800more per week than it does with no recycling. Therefore, the campground 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$2,700$2,400=$300

$2,700$2,400=$300per week. Therefore, the tannery should be willing to use the recycling method if it is compensated with at least $300 per week.

Suppose the campground has the property rights to the river. That is, the campground has the right to a clean (unpolluted) river. In this case, assuming the two firms can bargain at no cost, the tannery will the recycling method and will pay the campground 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 firms can bargain at no cost, the tannery will the recycling method, and the campground will pay the tannery per week.

The tannery will make the most economic profit when .

True or False: The river will remain polluted, regardless of who has the property rights.

True

False