A rancher earns a profit of $500. A farmer also earns a profit of S500, but he l

Question

A rancher earns a profit of $500. A farmer also earns a profit of S500, but he loses $60 if the rancher's cattle stray onto his property. The farmer could fence in his property for $95 and the rancher could fence in his property for $110, either of which would prevent the cattle from damaging the farmer's crops Answer questions (a)-(e) for each of the four legal rules given below. a. What is the outcome with no negotiations - the farmer's crops are damaged, the farmer builds a fence or the rancher builds a fence? b. What are the profits to each party if there is no negotiation possible? c. Calculate the surplus from cooperative negotiations. d. What happens in the reasonable solution? Be precise. e. What are the profits to each party in the reasonable solution? 1. No relief- The rancher can do whatever he wants. 2. The court issues an injunction ordering the rancher to build a fence. 3. The court requires the rancher to pay the farmer's $60 damages if his cattle damage the farmer's crops. "Superdamages" - If the rancher's cattle damage the farmer's crops, the rancher has to pay $600 in damages to the farmer (10 times the actual damages). 4. To sum up: What is the efficient outcome- the farmer's crops are damaged, the farmer builds a fence or the rancher builds a fence? 5. 6. Which legal rules produce the efficient outcome if there are no negotiations? 7. Compare the efficiency of the four legal rules when negotiation is easy.

Explanation / Answer

A rancher earns a profit of $500; a farmer earns a profit of $500

Loses $60 if the rancher's property strays on to the property.

Famer fences in the property at $95

Rancher fences the property for $110

Answer question a-c for each of the four legal rules

a) The farmer builds a fence, or, the crops are damaged

b) 500; 440 or 405 for rancher and farmer respectively; farmer earns 440 suffering losses, or, spends 95 in this particular year; earning 405

If rancher spends, earnings are 390, and, $500 for rancher, and, the farmer respectively

c) in this particular year,

500 - 110, and, 500

or 500; and, 500 - 95

500 - 110; 500 - 95; = 390, 405 for the rancher, and, the farmer respectively

Next year

500, 500

d) Reasonable solution

Both fence as the cattle should not be kept in the ranch; farmer should protect his field and fence

Rancher's damages are not mentioned

Farmer can face losses of $60 or fence this year earn $405, and, $500 each year after this

If the rancher fences, even then fence is required

The farmer spends extra $35 this year, and, earns extra $60 each yeaer

e) Profits to each party

if rancher fences

390; 405

390; 500

if rancher does not fence

500; 405; in the current year, and, 500, 500 in the subsequent years

500;440

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