Question

Problem 2: The Problem of Social Cost. A Rancher and Farmer live side-by-side to each other. 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 for US$50.00 or, alternatively, around the Rancher’s land US$75.00.

1.Identify the optimal solution when three are no Transaction Costsa.Fence around Farmer’s Landb.Fence around Rancher’s Landc.No Fence

2.Based upon the optimal solution above, can the Farmer and Rancher to achieve a negotiated arrangement. _____YES ______NO

a.Up to how much would the Rancher be willing to pay to achieve the optimal solution, if it is responsible for the societal loss.

b.Up to how much would the Farmer be willing to pay to achieve the optimal solution, if it is responsible for the societal loss.

3.Assume the legislature imposes a policy stating that the Rancher is liable for crop damages. In a world of positive transaction costs in the amount of$35.00, confirm whether or not the optimal solution identified in a world of zero transactions can be achieved. Explain.

Answer 1

Ans

1 fence around farmers land as it is least costly and lead to equal savings

2 Yes but only if property rights are assigned fully

3 upto 75. Otherwise it will be beblneficial for hone to build fence

4 upto 50.logic same as in 3

Can answer only 4 parts according to Chegg policy