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Consider a river found in the city of Philadelphia, and then answer the questions that follow. The city has a campground whose visitors use
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 chemical plant that dumps industrial waste into the river. This pollutes the river and makes it a less desirable vacation destination. That is, the chemical plant's waste decreases the campground's economic profit. Suppose that the chemical plant 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 chemical plant uses the recycling method, then the chemical plant's economic profit is $2,500 per week, and the campground's economic profit is $2,500 per week. If the chemical plant does not use the recycling method, then the chemical plant's economic profit is $2,800 per week, and the campground's economic profit is $1,700 per week. These figures are summarized in the following table. Suppose that the chemical plant 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 chemical plant uses the recycling method, then the chemical plant's economic profit is $2,500 per week, and the campground's economic profit is $2,500 per week. If the chemical plant does not use the recycling method, then the chemical plant's economic profit is $2,800 per week, and the campground's economic profit is $1,700 per week. These figures are summarized in the following table. Complete the following table by computing the total profit (the chemical plant's economic profit and the campground's economic profit combined) with and without recycling. Profit Chemical Plant Campground Total Action (Dollars) (Dollars) (Dollars) No Recycling 2,800 1,700 4,500 Recycling 2,500 2,500 5,000 Total economic profit is highest when the recycling production method is used When the chemical plant uses the recycling method, the campground earns $2,500- $1,700=$800 more per week than it does with no recycling. Therefore, the campground should be willing to pay up to $800 per week for the chemical plant to recycle water. However, the recycling method decreases the chemical plant's economic profit by $2,800- $2,500= $300 per week. Therefore, the chemical plant should be willing to use the recycling method if it is compensated with at least $300 per week. Total economic profit is highest when the recycling production method is used When the chemical plant uses the recycling method, the campground earns $2,500- $1,700%3D $800 more per week than it does with no recycling. Therefore, the campground should be willing to pay up to $800 per week for the chemical plant to recycle water. However, the recycling method decreases the chemical plant's economic profit by $2,800- $2,500 $300 per week. Therefore, the chemical plant 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 chemical plant will the recycling method and will pay the campground use $0 per week. Now, suppose the chemical plant 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 chemical plant will v the recycling method, and the campground will pay the chemical plant use between $300 and $800 per week. The chemical plant will make the most economic profit when the campground has property rights to a clean river True or False: The chemical plant will use the recycling method only if the campground has the property rights. True False
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