Question

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Farmer Smith's cattle wander into Farmer Jones' land once a month and cause $3,000 of damage. If Smith reduced the size of his herd by half it would reduce the damage by half but it would also reduce his profits from $7,500 to $3,500. If Smith left the cattle business entirely, he would lose the entire $7,500. If the two parties could negotiate at zero transactions cost what would be the resulting size of the herd? If there are large transactions costs, Jones hires a lawyer and sues Smith for damages. You are the local judge. Should you allow Jones to collect damages from Smith? If so how much would you award? Explain your decision

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