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 research lab that dumps industrial waste into the river. This pollutes the river and makes it a less desirable vacation destination. That is, the research lab's waste decreases the campground'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 river to levels safe for recreation, and the campground would no longer be affected. If the research lab uses the recycling method, then the research lab's economic profit is $1,800 per week, and the campground'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 campground's economic profit is $2,000 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 campground's economic profit combined) with and without recycling.

ActionProfit

Research LabCampgroundTotal(Dollars)(Dollars)(Dollars)No Recycling2,3002,000Recycling1,8002,800

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

When the research lab uses the recycling method, the campground earns$2,800$2,000=$800

$2,800$2,000=$800more per week than it does with no recycling. Therefore, the campground should be willing to pay up to $800 per week for the research lab to recycle water. However, the recycling method decreases the research lab's economic profit by$2,300$1,800=$500

$2,300$1,800=$500per week. Therefore, the research lab should be willing to use the recycling method if it is compensated with at least $500 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 research lab will the recycling method and will pay the campground per week.

Now, suppose the research lab 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 research lab will the recycling method, and the campground will pay the research lab per week.

The campground will make the most economic profit when .

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

True

False