Consider a rabbit farmer who lives next door to a dog breeder. If left unattended the breeders dogs roam to the rabbit farm and eat the little bunnies for a delicious snack. The dog breeder earns a profit of $50000 with his 25 dogs, but they inflict damages of $35000 on the rabbit farmer. The rabbit farmer can build a pen for his bunnies which is dog-proof at a cost of $20000. The dog breeder can build a fence to keep his dogs from roaming for $23000.

a. What is the efficient outcome here? Why? Compare net returns from doing nothing, with the case in which the farmer builds a pen and the dog breeder builds a fence. NOTE: Negotiation does not enter the calculus here.

b. Suppose that the rabbit farmer is granted a right to safe grazing for the bunnies so they do not need to be caged. Suppose it costs both the dog breeder and the rabbit farmer each $3500 to hire a lawyer if they negotiate. What is the likely outcome when property rights are assigned this way?

c. Now suppose that the property rights are assigned to the dog breeder. He has the right to let his dogs roam. It still costs $3500 for each person to hire a lawyer to negotiate any deviation from this initial assignment of property rights. What is likely to happen now?

d. GOOD NEWS! Due to the oversupply of lawyers, the cost of hiring a lawyer falls to $500 for each party. Now reconsider your answer in parts b and c.

e. What general proposition in property law does this example illustrate? Who discovered it?