Question

Suppose there is a jalapeño farmer that wants to use water from the Rapid River to irrigate her land. Further, suppose there is a fisherman who likes to fish in the Rapid River. As the amount of water in the river increases, the fishing improves. We can represent the marginal benefit the fisherman has for river water with a demand curve. If the farmer leaves water in the river, she can’t use it to irrigate her crop. We can represent her marginal cost of leaving water in the river with a supply curve. The demand schedule and supply schedule are given in the following table:

Units of water left in the river	Marginal Benefit for Fisherman (Demand)	Marginal Cost for Farmer (Supply)
0	-	-
1	21	4
2	17	8
3	13	12
4	9	16
5	5	20
What are the two factors/assumptions that would cause the bargaining/trading to breakdown in questions b and c? Explain.

Answer 1

Two factors that would lead to a breakdown in bargaining/trading are:-

• Depletion of water by a natural event such as drought.
• Disruption in the balance of water levels as a result of either side (farmer and fisherman) getting to derive excess benefits from the limited quantity of available resource which would have an adverse effect on both parties.

A natural event such as drought could affect both the farmer and the fisherman as lack of the main factor endowment in question is going to threaten both their livelihoods. On the other hand if either of them gets to utilize more than the limit ,let us say beyond 3 units of water, the other party has to bear the costs. This would lead to a breakdown in bargaining or trading.