QUESTION 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.Assume no costs other than the costs listed, notice each cost is listed as (per week).

There are three outcomes here:

1. The farmer builds and maintains a fence around the crops.

2. The rancher builds and maintains a fence around the herd.

3.No fence is built and the crops are damaged.

(a) Which is the efficient outcome?

a) The farmers builds and maintains a fence around the corps

b) The rancher builds and maintains a fence around the herd

c) No fence is built and the corps are damaged

(b) Suppose the rancher has the property rights, meaning the farmer has no legal claim if his crops are damaged.After any and all negotiationswhich of the three outcomes occurs according to the Coase Theorem?

a) The farmers builds and maintains a fence around the corps

b) The rancher builds and maintains a fence around the herd

c) No fence is built and the corps are damaged

(c) Suppose the farmer has the property rights, meaning the farmer has a legal claim if his crops are destroyed and will be able to recoup his damages.After any and all negotiationswhich of the three outcomes occurs according to the Coase Theorem?

a) The farmers builds and maintains a fence around the corps

b) The rancher builds and maintains a fence around the herd

c) No fence is built and the corps are damaged

In the scenario where the farmer has the property rights, in order for the farmer to agree to build and maintain a fence, the rancher must pay the farmer between $

a) 100

b) 200

c) 300

d) 400

e) 500

and $

a) 100

b) 200

c) 300

d) 400

e) 500

QUESTION 2

Now, imagine the damage from the trampling is actually only $200 per week (the costs to build and maintain the fence stay the same).

a) The farmers builds and maintains a fence around the corps

b) The rancher builds and maintains a fence around the herd

c) No fence is built and the corps are damaged

(b)Suppose the rancher has the property rights, meaning the farmer has no legal claim if his crops are damaged.After any and all negotiationswhich of the three outcomes occurs according to the Coase Theorem?

a) The farmers builds and maintains a fence around the corps

b) The rancher builds and maintains a fence around the herd

c) No fence is built and the corps are damaged

(c) Suppose the farmer has the property rights, meaning the farmer has a legal claim if his crops are destroyed and will be able to recoup his damages.After any and all negotiationswhich of the three outcomes occurs according to the Coase Theorem?

a) The farmers builds and maintains a fence around the corps

b) The rancher builds and maintains a fence around the herd

c) No fence is built and the corps are damaged

QUESTION 3

Define the Coase Theorem, and explain how your answers fit the Coase Theorem's predictions.Hint: If your answers above DO NOT fit in the prediction of the Coase Theorem, then you probably got the answers above incorrect.