Why is Citrus a natural pesticide?

Economic Question - trout farmer and pesticide maker are located near a lake.?

• The pesticide maker can dump its waste in the lake at no cost, or put it in a safe place at a cost of $600 per tonne. The pesticide company produces 5 tonnes of waste per year & will dispose of it in a cost minimizing manner. The trout farmer’s profit depends on how much waste the pesticide maker dumps in the lake and is given as follows: Quantity of waste in lake (tones per year)/Profits of the trout farmer (per year) 0/10,000 1/9,900 2/9,500 3/9,050 4/8,000 5/6,800 1.If transaction costs are prohibitively high so that the trout farmer & the pesticide maker won’t strike an agreement, then how much waste will be dumped in the lake? 2.If the trout farmer is given the right to the lake & that right is enforceable, & there are no transactions costs to writing contracts, then how much waste will be dumped in the lake? What is the min amount the farmer will need to be paid to accept the amount of waste in the lake? What is the max amount?

• Answer:

  1 - 5 tons per year. Assuming there are no non-economic incentives, it is in the pesticide maker's best interest, financially, to dispose of his waste in the lowest-cost manner, namely, by dumping it into the lake. If no agreement can be reached, then he will do so. 2 - 3 tons, $950, $1800. In this scenario, initially, the pesticide maker cannot dump any waste in the lake for free. Thus, his only alternative, before making a deal, is to spend $600 per ton of waste to dispose of it. If a deal were to be struck with the trout farmer, the pesticide maker would be willing to pay the farmer up to $600 per ton, if the farmer would accept it. Now let's look at the farmer's options. The only fair compensation required for the farmer to allow 1 ton of waste is a mere $100. Surely he would accept any value between $100-$600 from the pesticide maker. The farmer can profit by $500 in this scenario. For 2 tons, the pesticide maker would be willing to pay up to $1200, and the farmer would accept anything above $500. Here the farmer could profit by $700. For 3 tons, the pesticide maker would pay up to $1800. The farmer would require at least $950. The farmer stands to profit by a maximum of $850. For 4 tons, the pesticide maker would pay up to $2400, and the farmer would require more than $2000. The farmer could profit by $400 (notice that the profit has gone down). For the full 5 tons, the pesticide maker would pay up to $3000, and the farmer would require more than $3200. No deal could be made at 5 tons. The profit maximizing (for the farmer) quantity of waste to be dumped in the lake is, in this scenario, 3 tons.