Question

Suppose that 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 that 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?

Answer 1

Loss of profit of farmer in each year = $3,000.

If the arrester is installed by railroad, there will be no loss to farmer.

Annual cost of arrester = $1,750

Efficiency: Since $1,750 is smaller than $3,000, the economic loss of farmer is higher. Efficiency indicates the minimum waste or the minimum loss; if the arrester is installed the waste of money is only $1,750; if it is not installed the waste of money is $3,000. Therefore, it is better to use arrester. Therefore, farmer’s land should be efficiently used through the installation of arrester by the railroad.

Protection: The law should protect the farmer, since the loss of money is higher. If the farmer is protected, the annual cost of arrester would be $1,750 and there will be no loss of profit. In such case economic benefit would be ($3,000 - $1,750 =) $1,250.