Tutorial 2 answers - ECO320 Tutorial 2 2.8 Distinguish...

This preview shows page 1 - 3 out of 4 pages.

The preview shows page 1 - 3 out of 4 pages.
ECO320 – Tutorial 22.8Distinguish between between private marginal cost and social marginal cost for property
4.3Suppose a railroad runs beside a field in which commercial crops are grown.The railroad is powered bya steam locomotive that spews hot cinders out of its smokestack.From time to time those cinders landon the crops nearest to the track and burn them to the ground.Assume each year, the farmer whosecrops are burned loses $3000 in profits, and that the annual cost to the railroad of installing andmaintaining a spark-arrester that would prevent any damage to the crops is $1750.Does it matter tothe efficient use of the farmer’s land or to the efficient operation of the railroad whether the lawprotects the farmer from invasion by sparks or allows the railroad to emit sparks without liability?Why or why not?
To illustrate, assume that farmers like to eat more corn and less beef, whereas ranchers like to eat more beefand less corn.Assume that farmers and ranchers own their own land, that transaction costs are zero,and that fence is costly relative to their incomes. The change from “ranchers’ rights” to “farmers’rights” will increase the income of farmers and decrease the income of ranchers. Consequently, thedemand for corn will increase, and the demand for beef will decrease. Greater demand for cornrequires the planting and fencing of more cornfields.Thus, the change in law causes the building ofmore fences.

Upload your study docs or become a

Course Hero member to access this document

Upload your study docs or become a

Course Hero member to access this document

End of preview. Want to read all 4 pages?

Upload your study docs or become a

Course Hero member to access this document

Term
Summer
Professor
N/A
Tags
Economics, Ronald Coase, transaction costs

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture