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Question: 1 prof ronald coases seminal 1960 paper asks us to...

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1. Prof. Ronald Coases seminal 1960 paper asks us to imagine the following scenario. A farmer and a cattle rancher are operating on neighboring properties. Inevitably, some of the ranchers cattle manage to stray onto the farmers plot, damaging the crops and rendering them worthless. Now, consider the following numerical example: Suppose the cost to build a fence between the two properties that is strong enough to keep the cattle penned in is $10,000. The cattle rancher earns a profit of S300 per head of cattle, but the maximum number he can keep given the size of his property is 40. The farmers crops are quite valuable, earning her a profit per ton of harvest of $1000. Further, suppose that the relationship between the total head of cattle the rancher keeps and the crop loss to the farmer (in the absence of a fence) is as follows Head of cattle Total crop loss (tons 20 30 40 10 Assume that bargaining does not incur any additional cost to either the farmer or the rancher. Now answer the following questions a. Suppose the local government intervened and insisted that the cattle rancher either build a fence to keep his cattle on his property or compensate the farmer for the value of her lost crops. Which would he choose? If it is to compensate the farmer, what would be the equilibrium payment and given this payment, how many head of cattle would he keep? Thoroughly explain your answer Suppose instead the local government told the farmer they didnt really care. Her choices are then either to build a fence to keep the cattle off her property or to pay the cattle rancher to reduce the size of his herd. Which would she choose? If it is to pay the rancher to reduce the size of his herd, what would be the equilibrium payment and, given this payment, how many head of cattle would the rancher keep? Thoroughly explain your answer. b. c. Do either the cattle rancher or the farmer have an incentive to build the fence under any circumstance? Why or why not?

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