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Let's say that two neighbors have a problem with one another. Johnson's dog (call him J-Dawg) keeps "doing his business" in Smith's yard at a cost of $4,000 (PV) to Smith. Smith is upset and says so, but Johnson won't do anything to stop the mayhem. Smith consults an attorney who tells Smith that the court could either grant rights to Johnson to leave J-Dawg unfettered, or grant rights to Smith to have a dog-free yard. The problem could be fixed by Johnson if he simply bought a $40 leash and tether system to keep J-Dawg on his own yard. Smith could also fix the problem if he put a fence around his yard at a cost of $1,800. (Note: Smith would rather have a fence than have the dog problem continue.) Assume that costs are low when the neighbors bargain with one another. Assume that the parties divide any surpluses equally (using "fair" prices). A. Complete the following table to show the outcome when the court grants rights to Johnson to have J-Dawg unfettered. Neighbor Johnson Smith Total Threat Value Describe the cooperative solution including any payments made. Neighbor Johnson Smith Total Cooperative Solution B. Complete the following table to show the outcome when the court grants rights to Smith to have a dog-free yard: Threat Value Cooperative Solution Cooperative Surplus Describe the cooperative solution including any payments made. Cooperative Surplus

Let's say that two neighbors have a problem with one another. Johnson's dog (call him J-Dawg) keeps "doing his business" in Smith's yard at a cost of $4,000 (PV) to Smith. Smith is upset and says so, but Johnson won't do anything to stop the mayhem. Smith consults an attorney who tells Smith that the court could either grant rights to Johnson to leave J-Dawg unfettered, or grant rights to Smith to have a dog-free yard. The problem could be fixed by Johnson if he simply bought a $40 leash and tether system to keep J-Dawg on his own yard. Smith could also fix the problem if he put a fence around his yard at a cost of $1,800. (Note: Smith would rather have a fence than have the dog problem continue.) Assume that costs are low when the neighbors bargain with one another. Assume that the parties divide any surpluses equally (using "fair" prices). A. Complete the following table to show the outcome when the court grants rights to Johnson to have J-Dawg unfettered. Neighbor Johnson Smith Total Threat Value Describe the cooperative solution including any payments made. Neighbor Johnson Smith Total Cooperative Solution B. Complete the following table to show the outcome when the court grants rights to Smith to have a dog-free yard: Threat Value Cooperative Solution Cooperative Surplus Describe the cooperative solution including any payments made. Cooperative Surplus

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Let's say that two neighbors have a problem with one another. Johnson's dog (call him J-Dawg) keeps "doing his business" in Smith's yard at a cost of $4,000 (PV) to Smith. Smith is upset and says so, but Johnson won't do anything to stop the mayhem. Smith consults an attorney who tells Smith that the court could either grant rights to Johnson to leave J-Dawg unfettered, or grant rights to Smith to have a dog-free yard. The problem could be fixed by Johnson if he simply bought a $40 leash and tether system to keep J-Dawg on his own yard. Smith could also fix the problem if he put a fence around his yard at a cost of $1,800. (Note: Smith would rather have a fence than have the dog problem continue.) Assume that costs are low when the neighbors bargain with one another. Assume that the parties divide any surpluses equally (using "fair" prices). A. Complete the following table to show the outcome when the court grants rights to Johnson to have J-Dawg unfettered. Neighbor Johnson Smith Total Threat Value Describe the cooperative solution including any payments made. Neighbor Johnson Smith Total Cooperative Solution B. Complete the following table to show the outcome when the court grants rights to Smith to have a dog-free yard: Threat Value Cooperative Solution Cooperative Surplus Describe the cooperative solution including any payments made. Cooperative Surplus
Transcribed Image Text:Let's say that two neighbors have a problem with one another. Johnson's dog (call him J-Dawg) keeps "doing his business" in Smith's yard at a cost of $4,000 (PV) to Smith. Smith is upset and says so, but Johnson won't do anything to stop the mayhem. Smith consults an attorney who tells Smith that the court could either grant rights to Johnson to leave J-Dawg unfettered, or grant rights to Smith to have a dog-free yard. The problem could be fixed by Johnson if he simply bought a $40 leash and tether system to keep J-Dawg on his own yard. Smith could also fix the problem if he put a fence around his yard at a cost of $1,800. (Note: Smith would rather have a fence than have the dog problem continue.) Assume that costs are low when the neighbors bargain with one another. Assume that the parties divide any surpluses equally (using "fair" prices). A. Complete the following table to show the outcome when the court grants rights to Johnson to have J-Dawg unfettered. Neighbor Johnson Smith Total Threat Value Describe the cooperative solution including any payments made. Neighbor Johnson Smith Total Cooperative Solution B. Complete the following table to show the outcome when the court grants rights to Smith to have a dog-free yard: Threat Value Cooperative Solution Cooperative Surplus Describe the cooperative solution including any payments made. Cooperative Surplus
C. Comment on the efficient solution to the problem and on how the Coase Theorem applies to this example. D. Now let's say that there are transaction costs amounting to $2,000 (that's $1,000 for each neighbor) to negotiate and draw up a contract that identifies the parties' responsibilities and enforcement guidelines. What does the Normative Hobbes Theorem suggest should be done to fix the neighbors' problems?
Transcribed Image Text:C. Comment on the efficient solution to the problem and on how the Coase Theorem applies to this example. D. Now let's say that there are transaction costs amounting to $2,000 (that's $1,000 for each neighbor) to negotiate and draw up a contract that identifies the parties' responsibilities and enforcement guidelines. What does the Normative Hobbes Theorem suggest should be done to fix the neighbors' problems?
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