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

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ECO320 – Tutorial 2 2.8 Distinguish between between private marginal cost and social marginal cost for property
4.3 Suppose a railroad runs beside a field in which commercial crops are grown. The railroad is powered by a steam locomotive that spews hot cinders out of its smokestack. From time to time those cinders land on the crops nearest to the track and burn them to the ground. Assume each year, the farmer whose crops are burned loses $3000 in profits, and that the annual cost to the railroad of installing and maintaining a spark-arrester that would prevent any damage to the crops is $1750. Does it matter to the efficient use of the farmer’s land or to the efficient operation of the railroad whether the law protects 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 beef and 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, the demand for corn will increase, and the demand for beef will decrease. Greater demand for corn requires the planting and fencing of more cornfields. Thus, the change in law causes the building of more fences.

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