Question

Suppose that there is a cattle ranch next to a farm and that the rancher’s cattle trample the grain in the farmer’s fields. The gain to ranch is 9 and the cost to farmer is 5. Suppose there is no transaction cost. If the farmer has property rights, according to the Coase Theorem,

A. The cattle will trample the grain

B. The cattle will not trample the grain

C. The market outcome will be inefficient

D. The cattle may or may not trample the grain

Answer 1

Coase Theorem states that parties involved will achieve the efficient outcome through bargaining irrespective of who holds the porperty rights provided the transaction costs is zero.

The gain to ranch is 9 and cost to farmer is 5 dur to trampling of grain by rancher's cattle on the farmer's fields.

If rancher pays the farmer an amount of 5 then even though farmer has property rights, he will allow the trampling of grain by cattles. In such scenario, rancher will still gain an amount of 4.

So, according to the Coase Theorem, the cattle will trample the grain.

Hence, the correct answer is the option (A).