The Browns and Kramers are neighbors. The Kramers have a daughter, Jennifer, who roams the neighborhood, usually into the Brown's backyard. Last year the Browns sustained $500 in damage from Jennifer's roaming and expect the same to occur this year. The Browns have looked into the cost of a fence and have discovered the cost to build a privacy fence around their yard will be $1,500. (a) Suppose property rights are assigned to the Kramers. What outcome would you expect to occur? (b) Suppose property rights are assigned to the Browns. What outcome would you expect to occur? (c) Do the results in parts a) and b) violate the Coase theorem? (d) How would your answers to parts a) and b) change if the cost of Jennifer's damage was $3,000.
The Browns and Kramers are neighbors. The Kramers have a daughter, Jennifer, who roams the neighborhood, usually into the Brown's backyard. Last year the Browns sustained $500 in damage from Jennifer's roaming and expect the same to occur this year. The Browns have looked into the cost of a fence and have discovered the cost to build a privacy fence around their yard will be $1,500. (a) Suppose property rights are assigned to the Kramers. What outcome would you expect to occur? (b) Suppose property rights are assigned to the Browns. What outcome would you expect to occur? (c) Do the results in parts a) and b) violate the Coase theorem? (d) How would your answers to parts a) and b) change if the cost of Jennifer's damage was $3,000.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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