Problem -
A Rancher and Farmer live side-by-side. The property separation at this point in time is nothing more than an imaginary line. As a result, the Rancher's cattle may eat the Farmer's corn resulting in a societal loss of $100. The loss could be mitigated by installing a fence around the Farmer's land or, alternatively, around the Rancher's land. You will need to consider two scenarios: one, a world of zero transaction costs; and two, a world of positive transaction costs of $35 (the cost that must be incurred for the Rancher and Farmer to come together to negotiate a solution. The below table summarized the above.
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SOLUTION CHOICES
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Cost
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Scenario 1
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Scenario 2
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Fence Around Farmer's Land
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US$050
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Fence Around Rancher's Land
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US$075
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No-Fence - Damage to Corn
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US$100
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Transaction Cost
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US$00
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US$35
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1. Identify the optimal solution for Scenario 1, no Transaction Costs. Identify the potential bargaining range.
Action -
a. Fence Farmer's Land
b. Fence Rancher's Land
c. No Fence
2. Who should have the property right under Scenario 1?
3. Assume the legislature imposes a policy stating that the Rancher is liable for crop damages. That is, the Rancher would need to cover the loss to the Farmer. Under Scenario 1, is the optimal, least cost, solution be achieved?
4. Assume the legislature imposes a policy stating that the Rancher is liable for crop damages. That is, the Rancher would need to cover the loss to the Farmer. Under Scenario 1, what amount would the Rancher be willing to pay the Farmer to achieve the optimal, least cost, solution?
5. Assume the legislature imposes a policy stating that the Rancher is liable for crop damages. That is, the Rancher would need to cover the loss to the Farmer. Under Scenario 2 (a Transaction Cost of s35), is the optimal, least cost, solution be achieved?