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ECON 319: Questions and Solutions, Essay Example

Pages: 2

Words: 582

Essay
  1. Under a zero liability rule, how many cattle does the rancher run?

Given that the Marginal Net Benefit is equal to 50-2C, it could be assumed that the rancher runs at least 48 cattle before any particular negotiations between him and the farmer occurred.

  1. Under the full liability rule, how many head of cattle does the rancher run? In this case, the rancher is legally prohibited from imposing any damages on the farmer.

Assuming that the calculation is dependent on the estimation of marginal damages at 3C, the rancher is specified to be running 45 cattle heads given that he is legally prohibited from incurring any damages against the farmer and negotiations have not been incurred yet.

  1. Now assume a zero liability rule, but allow the rancher and the farmer to undergo negotiations. What is the optimal number of cattle? Who pays the cost of compensation? What is the value of compensation payment? What is the net gain of negotiation to each?

With negotiations considered, and the marginal damage imposed, the 48 cattle heads shall be carried into account. In relation to the case situation being defined, the one to pay the value of the compensation payment is the rancher as his cattle were the ones that damaged the farmer’s property. Nevertheless, since the zero liability rule is carried into consideration, the farmer might need to consider his share of cost payment especially that the cattle owned by the rancher is considered as separate from the owner.

  1. Assume a full liability rule and allow the rancher and farmer to negotiate. What is the optimal number of cattle? Who pays the cost of compensation? What is the value of compensation payment? What is the net gain of negotiation to each?

With negotiations considered, assuming the full responsibility rule, the rancher is held in account for the need of paying the damages as it is carried into consideration in this case that he takes full responsibility of what he owns and what damages they may implicate on others. Relatively, this indicates that the responsibility over the actions of the cattle is fully placed upon the shoulders of the owner. This means that the cattle and the owner are not considered as separate entities, which is a specific condition that is differentiated from the case of zero-liability rule.

  1. If a strong fence could be built for $200 to protect the farmer’s crop and keep away the cattle from the field, would this affect your answer in numbers 3 and 4?

The $200 cost for a fence would fully affect the answers to questions 3 and 4. For question 3, the changes would implicate a two-way distinction on the value responsibility between the rancher and the farmer as they would share the need to pay the said amount. On the other end, the changes in question umber four would be that the rancher would have to consider adding up to his compensation payment for the damages that his cattle has done and establish the need for the fence to be paid for and placed as a sense of protection on the farmer’s crops.

  1. If a strong fence could be built for $600 to protect the farmer’s crop and keep away the cattle from the field, would this affect your answer in numbers 3 and 4?

A higher amount of $600 dollars for the fence to be built would of course affect the answers for questions three and four in the same manner that has been responded to in question number 5.

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