Consider a town with a river. The town has a hiking lodge whose visitors use the
ID: 1207848 • 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
Use (since profit from using i.e. $28000 is greater than total profit from not using i.e. $26000) Use between $6000 and $8000 Use between $6000 and $8000 Part (a) is correct, as it shows the benefits from bargaining