Question
4. (20 Points) Consider the economic implications of homesteading, the mechanism by which large parts of the United States converted from government property to private
4. (20 Points) Consider the economic implications of homesteading, the mechanism by which large parts of the United States converted from government property to private property. Under the Homestead Act of 1862, a settler obtained ownership of a quarter section of land (160 acres) by farming it for a fixed number of years and meeting a variety of other requirements such as successfully growing fruit trees on it. Assume a potential homesteader is considering a piece of land that is beyond the margin of settlement (too far from railroads, feed stores, and people) to cultivate at the current time. As time passes and the settlement expands the land will become profitable to cultivate. The efficient rule is to start farming the particular piece of land when it becomes profitable, say 1890.
(a) Homesteading land that is profitable to farm at the time (1890) is an attractive proposition to a potential farmer, since farming the land prior to 1890 would imply annual losses. In this case, a homesteader would certainly acquire ownership of land that produces a positive net return from the beginning. Since private ownership to a valuable asset is being assigned for "free", why would a potential homesteader have to begin farming the land before it becomes profitable? If the land is worth $10,000 during the first year it becomes profitable to farm (that is, the present value of the expected future earnings is $10,000), and the annual loss from earlier farming is $1,000 per year, about when would the land be homesteaded? Explain why the effect of the Homesteading Act was to wipe out, in costs of premature farming, a large part of the land value of the United States.
(b) How is the logic of the inefficiency of homesteading similar to the inefficiency that arises with theft? In what sense are the parties in both cases competing to obtain something of value that already exists? Carefully explain.
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