Consider a town with a river. The town has a hiking lodge whose visitors use the
ID: 1207845 • Letter: C
Question
Consider a town with a river. The town has a hiking lodge whose visitors use the river for recreation. The town also has a chemical plant that creates industrial waste, which it dumps into the river. This pollutes the river and makes it a less desirable vacation destination. That is, the chemical plant's effluent decreases the hiking lodge's profit Throughout this problem, assume that negotiations are costless Suppose that the chemical plant could use an alternative production method involving water recycling. This would reduce the pollution in the river to levels safe for recreation, and the hiking lodge would no longer be affected. If the chemical plant uses the recycling method, then the chemical plant's profit is$10,000 per week, and the hiking lodge's profit is $18,000 per week. If the chemical plant does not use the recycling method, then the chemical plant's profit is $16,000 per week, and the hiking lodge's profit is $10,000 per week Total profit (the chemical plant's profit and the hiking lodge's profit combined) is highest when the recycling production method is used/not used When the chemical plant uses the recycling method, the hiking lodge earns $18,000 $10,000 $8,000 more per week than it does with no recycling. Therefore, the hiking lodge should be willing to pay up to $8,000 per week for the chemical plant to use water recycling. However, the recycling method decreases the chemical plant's profit by $16,000 $10,000 $6,000 per week. Therefore, the chemical plant should be willing to use the recycling method if it is compensated with at least $6,000 per week Suppose the hiking lodge has the property rights to the river. That is, the hiking rodge has the right to a clean (unpolluted) river. In this case, assuming the two firms can bargaihSt HUP8t, Se aHemice? plaie will (unpolluted) river. In this case, assuming the two firms can bargain)(atWR R, use/not usethe recycling method and will pay the hiking lodab etween $6000 and $8000 per week between $2000 and $6000Explanation / Answer
)1)
At the point when fish cannery utilizes reusing strategy, all out benefit = $10,000 + $18,000 = $28,000
In any case, when fish canner does not reuse, absolute benefit = $16,000 + $10,000 = $26,000
So joint benefit is amplified when recyling is finished.
(2)
Here, trekking lodge has property rights. So angle cannery needs to choose its game-plan.
It can settle on repaying climbing stop a sum equivalent to its inescapable benefit without reusing, i.e. $8,000, or doing reusing and acknowledge a benefit lower by $6,000.
Along these lines, fish cannery will do reusing and pay nothing to the climbing lodge.
(3)
For this situation, fish cannery claims property rights. So climbing cabin will choose its game-plan.
So it must pick between paying the fish cannery $6,000 for reusing (and acquire additional $8,000 every week, making net increase of $2,000), or surrender the extra $8,000 every week without reusing.
Subsequently, angle cannery will utilize reusing strategy and trekking hotel will pay it $6,000 every week.
(4)
Just the last choice is valid. At the point when trekking lodge has property rights, its incremental benefit is $2,000 and when fish cannery has property rights, its incremental benefit is $2,000.