The effects of property rights on achieving efficiency

Consider a lake in the village of Sturbridge, and then answer the questions that follow.

"The village has a hiking lodge whose visitors use the lake for recreation. The village also has a tannery that dumps industrial waste into the lake. This pollutes the lake and makes it a less desirable vacation destination. That is, the tannery's waste decreases the hiking lodge's economic profit."

Suppose that the tannery 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 hiking lodge would no longer be affected. If the tannery uses the recycling method, then the tannery's economic profit is $1,400 per week, and the hiking lodge's economic profit is $2,700 per week. If the tannery does not use the recycling method, then the tannery's economic profit is $2,200 per week, and the hiking lodge's economic profit is $1,500 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 hiking lodge's economic profit combined) with and without recycling.

Action Tannery (dollars). Hiking Lodge Total Dollars

No recycling2,200 1,500

Recycling 1,400 2,700

Total economic profit is highest when the recycling production method is (not used or used) .

When the tannery uses the recycling method, the hiking lodge earns$2,700- $1,500=$1,200more per week than it does with no recycling. Therefore, the hiking lodge should be willing to pay up to $1,200 per week for the tannery to recycle water. However, the recycling method decreases the tannery's economic profit by$2,200$1,400=$800

per week.

Therefore, the tannery should be willing to use the recycling method if it is compensated with at least $800 per week.

Suppose the hiking lodge has the property rights to the lake. That is, the hiking lodge has the right to a clean unpolluted lake. In this case, assuming the two firms can bargain at no cost, the tannery will (not use or use) the recycling method and will pay the hiking lodge ($0, between 0 and 400, between 400 and 800, between 800 and 1,200) per week.

Now, suppose the tannery 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 tannery will(not use or use)the recycling method, and the hiking lodge will pay the tannery ($0, between 0 and 400, between 400 and 800, between 800 and 1,200)per week.

The tannery will make the most economic profit when (it has property rights to pollute the lake or the hiking lodge has property rights to a clean lake.)

True or false? The lake will remain polluted, regardless of who has the property rights.