Consider a lake found in the town of Center Barnstead, and then answer the questions that follow.The town has a water park whose visitors use the lake forrecreation. The town also has a ketchup factory that dumpsindustrial waste into the lake. This pollutes the lake andmakes it a less desirable vacation destination. That is, theketchup factory's waste decreases the water park's economicprofit.Suppose that the ketchup factory could use a different production method that involves recycling water. This would reduce the pollution in the lake tolevels safe for recreation, and the water park would no longer be affected. If the ketchup factory uses the recycling method, then the ketchup factory'seconomic profit is $900 per week, and the water park's economic profit is $2,600 per week. If the ketchup factory does not use the recycling method,then the ketchup factory's economic profit is $1,600 per week, and the water park's economic profit is $1,500 per week. These figures aresummarized in the following table. When the ketchup factory uses the recycling method, the water park earns $2,600 - $1,500 = $1,100 more per week than it does with no recycling.Therefore, the water park should be willing to pay up to $1,100 per week for the ketchup factory to recycle water. However, the recycling methoddecreases the ketchup factory's economic profit by $1,600 - $900 = $700 per week. Therefore, the ketchup factory should be willing to use therecycling method if it is compensated with at least $700 per week.Suppose the water park has the property rights to the lake. That is, the water park has the right to a clean (unpolluted) lake. In this case, assumingthe two firms can bargain at no cost, the ketchup factory willthe recycling method and will pay the water parkper week.Now, suppose the ketchup factory has the property rights to the lake, including the right to pollute it. In this case, assuming the two firms can bargainat no cost, the ketchup factory willthe recycling method, and the water park will pay the ketchup factoryThe ketchup factory will make the most economic profit whenper week.True or False: The ketchup factory will use the recycling method only if the water park has the property rights.TrueFalse

The Coase theorem postulates that when property rights are clearly defined, perfect competition…

Consider a lake found in the town of Center Barnstead, and then answer the questions that follow. The town has a water park whose visitors use the lake for recreation. The town also has a ketchup factory that dumps industrial waste into the lake. This pollutes the lake and makes it a less desirable vacation destination. That is, the ketchup factory's waste decreases the water park's economic profit. Suppose that the ketchup factory 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 water park would no longer be affected. If the ketchup factory uses the recycling method, then the ketchup factory's economic profit is $900 per week, and the water park's economic profit is $2,600 per week. If the ketchup factory does not use the recycling method, then the ketchup factory's economic profit is $1,600 per week, and the water park's economic profit is $1,500 per week. These figures are summarized in the following table.

Consider a lake found in the town of Center Barnstead, and then answer the questions that follow. The town has a water park whose visitors use the lake for recreation. The town also has a ketchup factory that dumps industrial waste into the lake. This pollutes the lake and makes it a less desirable vacation destination. That is, the ketchup factory's waste decreases the water park's economic profit. Suppose that the ketchup factory 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 water park would no longer be affected. If the ketchup factory uses the recycling method, then the ketchup factory's economic profit is $900 per week, and the water park's economic profit is $2,600 per week. If the ketchup factory does not use the recycling method, then the ketchup factory's economic profit is $1,600 per week, and the water park's economic profit is $1,500 per week. These figures are summarized in the following table.

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter10: Externalities

Section10.1: Externalities And Market Inefficiency

Problem 1QQ

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