1. Consider a farmer and a rancher who operate near one another. The farmer grows crops and the rancher's herd wanders and tramples the farmer's crops. When the herd tramples the crops, it causes $400 per week worth of damage to the farmer.

The rancher could build a maintain a fence around the herd for $500 per week. The farmer could build and maintain a fence around the crops for $300 per week. Assume there are no transaction costs.

(a) What is the ecient outcome?

(b) Suppose the farmer has the property rights, meaning the farmer has a legal claim if his crops are destroyed. What would the rancher do? Does he build a fence around his herd, let the herd trample the crops and pay damages, or is there another option?

(c) Suppose the rancher has the property rights, meaning the farmer has no legal claim if his crops are destroyed. What would the farmer do?

Now, imagine the damage from the trampling is actually only $200. (d) Now what is the ecient outcome?

(e) If the farmer has the property rights, what does the rancher do?

(f) If the rancher has the property rights, what does the farmer do?

(g) Dene the Coase Theorem, and explain how your answers t the Coase Theorem's predictions.