Question

A corn farmer lives next to a cattle farmer. There is no fence between them. A problem has emerged. The cattle are straying into the corn fields and eating the corn. The corn farmer takes the cattle farmer to court. The court will decide the case by awarding the property right to one of the farmers – the right of the corn farmer to have the cattle farmer prevent the cattle from intruding or the right of the cattle farmer to expect the corn farmer to prevent this. How will the ultimate solution differ between these two alternatives – 1. The corn farmer gets the property right or 2. The cattle farmer gets the property right? In awarding the right what should the judge consider?

Answer 1

For each cattle the cattle farmer raises, there is an associated reduction in corn farmer's crop. Also, each cattle the cattle farmer raises, imposes a private cost (that is the cost of raising it) and a social cost (the cost to corn farmer in corn damages due to cattle straying into the corn field). The social cost is obviously a negative externality cost created by the cattles. So, because of the cattle farmer, the marginal social cost exceeds marginal private cost and lies above the Marginal private cost curve.

Here the solution is the judge should give the property right to the corn farmer, so that the external cost created by the cattle farmer will be reduced and externality will be internalized.