Let's say that two neighbors have a problem with one another. Johnson's dog (call him J-Dawg) keeps "doing his business" in Smith's yard at a cost of $4,000 (PV) to Smith. Smith is upset and says so, but Johnson won't do anything to stop the mayhem. Smith consults an attorney who tells Smith that the court could either grant rights to Johnson to leave J-Dawg unfettered, or grant rights to Smith to have a dog-free yard. The problem could be fixed by Johnson if he simply bought a $40 leash and tether system to keep J-Dawg on his own yard. Smith could also fix the problem if he put a fence around his yard at a cost of $1,800. (Note: Smith would rather have a fence than have the dog problem continue.) Assume that costs are low when the neighbors bargain with one another. Assume that the parties divide any surpluses equally (using "fair" prices). A. Complete the following table to show the outcome when the court grants rights to Johnson to have J-Dawg unfettered. Neighbor Johnson Smith Total Threat Value Describe the cooperative solution including any payments made. Neighbor Johnson Smith Total Cooperative Solution B. Complete the following table to show the outcome when the court grants rights to Smith to have a dog-free yard: Threat Value Cooperative Solution Cooperative Surplus Describe the cooperative solution including any payments made. Cooperative Surplus
Let's say that two neighbors have a problem with one another. Johnson's dog (call him J-Dawg) keeps "doing his business" in Smith's yard at a cost of $4,000 (PV) to Smith. Smith is upset and says so, but Johnson won't do anything to stop the mayhem. Smith consults an attorney who tells Smith that the court could either grant rights to Johnson to leave J-Dawg unfettered, or grant rights to Smith to have a dog-free yard. The problem could be fixed by Johnson if he simply bought a $40 leash and tether system to keep J-Dawg on his own yard. Smith could also fix the problem if he put a fence around his yard at a cost of $1,800. (Note: Smith would rather have a fence than have the dog problem continue.) Assume that costs are low when the neighbors bargain with one another. Assume that the parties divide any surpluses equally (using "fair" prices). A. Complete the following table to show the outcome when the court grants rights to Johnson to have J-Dawg unfettered. Neighbor Johnson Smith Total Threat Value Describe the cooperative solution including any payments made. Neighbor Johnson Smith Total Cooperative Solution B. Complete the following table to show the outcome when the court grants rights to Smith to have a dog-free yard: Threat Value Cooperative Solution Cooperative Surplus Describe the cooperative solution including any payments made. Cooperative Surplus
Principles of Microeconomics
7th Edition
ISBN:9781305156050
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter22: Frontiers Of Microeconomics
Section: Chapter Questions
Problem 8PA
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Transcribed Image Text:Let's say that two neighbors have a problem with one another. Johnson's dog (call him J-Dawg) keeps
"doing his business" in Smith's yard at a cost of $4,000 (PV) to Smith. Smith is upset and says so, but
Johnson won't do anything to stop the mayhem. Smith consults an attorney who tells Smith that the
court could either grant rights to Johnson to leave J-Dawg unfettered, or grant rights to Smith to have a
dog-free yard. The problem could be fixed by Johnson if he simply bought a $40 leash and tether system
to keep J-Dawg on his own yard. Smith could also fix the problem if he put a fence around his yard at a
cost of $1,800. (Note: Smith would rather have a fence than have the dog problem continue.)
Assume that costs are low when the neighbors bargain with one another. Assume that the parties
divide any surpluses equally (using "fair" prices).
A. Complete the following table to show the outcome when the court grants rights to Johnson to
have J-Dawg unfettered.
Neighbor
Johnson
Smith
Total
Threat Value
Describe the cooperative solution including any payments made.
Neighbor
Johnson
Smith
Total
Cooperative
Solution
B. Complete the following table to show the outcome when the court grants rights to Smith to
have a dog-free yard:
Threat Value
Cooperative
Solution
Cooperative
Surplus
Describe the cooperative solution including any payments made.
Cooperative
Surplus
Transcribed Image Text:C. Comment on the efficient solution to the problem and on how the Coase Theorem applies to
this example.
D. Now let's say that there are transaction costs amounting to $2,000 (that's $1,000 for each
neighbor) to negotiate and draw up a contract that identifies the parties' responsibilities and
enforcement guidelines. What does the Normative Hobbes Theorem suggest should be done to
fix the neighbors' problems?
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