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A rancher and a farmer are located next to each other
A rancher and a farmer are located next to each other. Here are the facts of their situation:
There is no fence between the ranch and the farm. The cattle enter the farmer's fields and destroy $300 worth of corn each year.
The rancher's business is worth $1000 annually (not taking into account any crop damage).
The farmer's business is worth $800 before the cattle trample the corn. It would cost the rancher $100 to build a fence that would keep the cattle on his property. It would cost the farmer $400 to build a fence that would keep the cattle out of her property.
Assume that it costs the rancher and the farmer nothing to negotiate with each other.
a. Suppose the rancher has to compensate the farmer for any crop damage. Will a fence get built? If so, who will build it and who will pay for it? How much better off do you think the farmer will be as the result of the fence? The rancher? Explain your answer.
b. Suppose the farmer has to absorb (pay for) the crop damage herself. Will a fence get built? If so, who will build it and who will pay for it? How much better off do you think the farmer will as the result of the fence? The rancher? Explain your answer.
Expert Solution
a. Yes, the fence gets built in this case and rancher builds it. This is because if the rancher has to compensate the farmer for the loss he has to pay him 300 dollars which is greater than the cost of making a fence which is 100 dollars. Therefore, the rancher is better off with making a fence in place of compensating the farmer. The farmer is also now better off as now he enjoys his complete business profit of 800 dollars as the cost imposed by cattle of 300 dollars is now removed due to the construction of the fence.
b. In case a farmer has to absorb the losses the fence does not get built as the cost to the farmer of making a fence is 400 dollars which is greater than the cost of bearing the losses due to the cattle destroying the crops which is 300 dollars. Hence the fence does not get built.
A farmer can negotiate with the rancher and ask him to build a fence by paying him the cost of construction which is 100 dollars. So the farmer will have to pay rancher 100 dollars and will save himself from the loss of 300 dollars therefore, a total gain of 200 dollars for himself. Rancher is indifferent as he has neither lost nor gained from the construction of a fence.
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