metric Information (Ch 17) Attempts Keep the Highest / 6 dy Tools 5. The effects of property rights on achieving efficiency Consider a lake found in the village of Sturbridge, and then answer the questions that follow. Tips Tips The village has a resort whose visitors use the lake for recreation. The village 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 profit. 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 lab's economic profit is $2,000 per week, and the resort's economic profit is $2,900 per week. If the research lab does not use the recycling method, then the research lab's economic profit is $2,700 per week, and the resort's economic profit is $1,900 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 resort's economic profit combined) with and without recycling. Profit Research Lab Resort Total Action (Dollars) (Dollars) (Dollars) No Recycling 2,700 1,900 Recycling 2,000 2,900 Total economic profit is highest when the recycling production method is When the research lab uses the recycling method, the resort earns $2,900 - $1,900 - $1,000 more per week than it does with no recycling. Therefore, the resort should be willing to pay up to $1,000 per week for the research lab to recycle water. However, the recycling method decreases the research lab's economic profit by $2,700 - $2,000 = $700 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 firms can bargain at no cost, the research lab will the recycling method and will pay the resort 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 firms can bargain at no cost, the research lab will the recycling method, and the resort will pay the research lab per week. The resort will make the most economic profit when True or False: The lake will remain polluted (at an unsafe level), regardless of who has the property rights. True O False Grade It Now Save & Continue Continue without saving