ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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Consider a river found in the city of Philadelphia, and then answer the questions that follow.

Consider a river found in the city of Philadelphia, and then answer the questions that follow.
The city has a hiking lodge whose visitors use the river for
recreation. The city also has a tannery that dumps industrial
waste into the river. This pollutes the river 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 river 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 $1,500
per week, and the hiking lodge's economic profit is $1,800 per week. If the tannery does not use the recycling method, then the tannery's economic
profit is $2,000 per week, and the hiking lodge's economic profit is $1,000 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.
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Transcribed Image Text:Consider a river found in the city of Philadelphia, and then answer the questions that follow. The city has a hiking lodge whose visitors use the river for recreation. The city also has a tannery that dumps industrial waste into the river. This pollutes the river 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 river 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 $1,500 per week, and the hiking lodge's economic profit is $1,800 per week. If the tannery does not use the recycling method, then the tannery's economic profit is $2,000 per week, and the hiking lodge's economic profit is $1,000 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.
Profit
Tannery
Hiking Lodge
Total
Action
(Dollars)
(Dollars)
(Dollars)
No Recycling
2,000
1,000
Recycling
1,500
1,800
Total economic profit is highest when the recycling production method is
When the tannery uses the recycling method, the hiking lodge earns $1,800 – $1,000 = $800 more per week than it does with no recycling. Therefore,
the hiking lodge should be willing to pay up to $800 per week for the tannery to recycle water. However, the recycling method decreases the tannery's
economic profit by $2,000 – $1,500 = $500 per week. Therefore, the tannery should be willing to use the recycling method if it is compensated with at
least $500 per week.
Suppose the hiking lodge has the property rights to the river. That is, the hiking lodge has the right to a clean (unpolluted) river. In this case, assuming the
two firms can bargain at no cost, the tannery will
the recycling method and will pay the hiking lodge
v per
week.
Now, suppose the tannery has the property rights to the river, including the right to pollute it. In this case, assuming the two firms can bargain at no cost,
the tannery will
the recycling method, and the hiking lodge will pay the tannery
per week.
The hiking lodge will make the most economic profit when
True or False: The river will remain polluted (at an unsafe level), regardless of who has the property rights.
O True
O False
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Transcribed Image Text:Profit Tannery Hiking Lodge Total Action (Dollars) (Dollars) (Dollars) No Recycling 2,000 1,000 Recycling 1,500 1,800 Total economic profit is highest when the recycling production method is When the tannery uses the recycling method, the hiking lodge earns $1,800 – $1,000 = $800 more per week than it does with no recycling. Therefore, the hiking lodge should be willing to pay up to $800 per week for the tannery to recycle water. However, the recycling method decreases the tannery's economic profit by $2,000 – $1,500 = $500 per week. Therefore, the tannery should be willing to use the recycling method if it is compensated with at least $500 per week. Suppose the hiking lodge has the property rights to the river. That is, the hiking lodge has the right to a clean (unpolluted) river. In this case, assuming the two firms can bargain at no cost, the tannery will the recycling method and will pay the hiking lodge v per week. Now, suppose the tannery has the property rights to the river, including the right to pollute it. In this case, assuming the two firms can bargain at no cost, the tannery will the recycling method, and the hiking lodge will pay the tannery per week. The hiking lodge will make the most economic profit when True or False: The river will remain polluted (at an unsafe level), regardless of who has the property rights. O True O False
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