My family eats a lot of eggs, so we're considering raising chickens in our backyard.Having chickens would give us $1,200 worth of benefit - they're cute pets, and fresh eggs are delicious!

One of our neighbors hates noise, and would suffer $500 of disutility if we got chickens.

Another of our neighbors has a beautiful garden, and worries that our chickens will get into their garden and destroy it.Without any other changes, the expected harm from our chickens getting into the neighbors' garden would be $400.However, for $200, these neighbors could put up fencing which would keep our chickens out of their garden.

Suppose that Madison law allows us to get chickens, and makes us liable (via a damages rule) for any nuisances they cause, including noise and damage to neighbors' gardens.

(a)Describe the efficient outcome.(Do we get chickens?Do our neighbors put fencing around their garden?)Explain why it's efficient.

(b)If transaction costs were high - there was no possibility of negotiation between us and our neighbors - what outcome would you predict will occur?Explain.

(c)If there were no transaction costs between us and our neighbors, what outcome does the Coase Theorem predict?Why?

(d)The outcome predicted by the Coase Theorem requires bargaining.

(i)Who needs to bargain with whom to achieve it?

(ii)What are the two sides' threat points, and what are the gains from cooperation?

(iii)If the gains are split evenly, who will end up paying what to whom in exchange for what?

Now suppose instead that Madison law allows anyone inconvenienced by their neighbors' chickens to obtain an injunction, forcing the owner to get rid of the chickens.

(e)If transaction costs are high, what outcome would you predict?Why?

(f)If there are no transaction costs, what outcome would you predict?Why?

(g)Would you expect transaction costs to be high or low?Why?Does this argue in favor of injunctive relief or a damages rule?