The damage to the farmer's crops is $200, the farmer's cost of a fence that will prevent the damage is $100, and the rancher's cost of a fence that will prevent the

damage is $150. Assume there are no other affected parties, and the rancher and the farmer know all information. Now, also assume this is an example of a tort rather than an example of property rights.

1. Which of the following best characterizes this situation?

a. Precaution is unilateral and undertaken by the injurer.

b. Precaution is unilateral and undertaken by the victim.

c. Precaution is bilateral.

d. Overprecaution due to evidentiary uncertainty.

2. Which of the following best characterizes this situation?

a. A negative externality created by independent profit functions.

b. A negative externality created by interdependent profit functions.

c. A positive externality created by independent profit functions.

d. A positive externality created by interdependent profit functions.

3. Under the rule of no liability, and where compensation is perfect, who builds a fence?

a. Rancher.

b. Farmer.

c. Both.

d. Neither.

4. Under the rule of strict liability, and where compensation is perfect, who builds a fence?

a. Rancher.

b. Farmer.

c. Both.

d. Neither.

Suppose the tort liability system works imperfectly and there is enforcement error so that there is a 1/3 probability the farmer brings suit and recovers money damages from the rancher, and both parties are risk-neutral. Under the rule of no liability, and when the system is imperfect in this way, who builds a fence?

a. Rancher.

b. Farmer.

c. Both.

d. Neither.