Question

1. Mr. Brown decided last year to raise chickens in his back yard. He built a chicken coop next to his property line with Mr. Adams. Mr. Adams finds the chickens annoying because of the smell, the noise they make, and because their feathers end up in his pool and can clog the filtering system.

It would be worth $500 to Mr. Adams to be free of the chicken noise and smell, and the need to frequently skim feathers from his pool. Mr. Brown could move his chicken coop to the other side of the yard for $350, which would cut the value of Mr. Adams utility loss from $500 to $250. Mr. Adams values the ability to keep his chickens at $400.

(3) a. Describe this situation using the economist’s concept of an externality

(3) b. Describe this situation in terms of conflicting property rights claims.

(4) c. What is the socially efficient outcome of this situation:

(i). No change is made

(ii). The chicken coop is moved

(iii). Adams gives up raising chickens

Explain your choice, using numbers.

(4) d. Assume that after discussing the situation and consulting lawyers, Adams and Brown learn that the law in their city is unclear regarding nuisance due to neighbor’s chickens. So, they go to court. The judge rules that Adams has every right to raise chickens and keep the coop where it is. Assuming that there are no transaction costs to bargaining between Smith and Adams, what will be the final outcome of the situation after this decision? Explain your answer.

(i). No change is made

(ii) The chicken coop is moved

(iii). Adams gives up raising chickens

(2) e.      T   F     In the legal case just described, Mr. Brown was the plaintiff.

(2) f.     T     F     According to the Coase theorem, even though this question assumes that

there are no transaction costs, different decision by the court would lead to different levels of relative welfare for Adams and Brown.

Answer 1

Mr. Brown decided last year to raise chickens in his back yard. He built a chicken coop next to his property line with Mr. Adams. Mr. Adams finds the chickens annoying because of the smell, the noise they make, and because their feathers end up in his pool and can clog the filtering system.

It would be worth $500 to Mr. Adams to be free of the chicken noise and smell, and the need to frequently skim feathers from his pool. Mr. Brown could move his chicken coop to the other side of the yard for $350, which would cut the value of Mr. Adams utility loss from $500 to $250. Mr. Brown values the ability to keep his chickens at $400.

(3) a. Describe this situation using the economist’s concept of an externality.

Externality is a situation where activities of one party affect other party without being compensated for it. It can affect both positively and negatively.

In this situation, Mr. Brown raises chickens and it disturbs Mr. Adams. Mr. Adams finds them annoying because of smell, the noise they make and because their feathers end up in his pool and can clog the filtering system. The activity of Mr. Brown is creating a negative externality for Mr. Adams.

(3) b. Describe this situation in terms of conflicting property rights claims.

Here, Mr. Brown has the property right over his yard. So he can do whatever he wants in his yard. But Mr. Adam also has his property right over his house, pool and filtering system which is facing cost due to Mr. Brown’s chickens. So there is a conflict between both property rights

(4) c. What is the socially efficient outcome of this situation:

(i). No change is made

(ii). The chicken coop is moved

(iii). Adams gives up raising chickens

Explain your choice, using numbers.

(i) If no change is made

Mr. Adams face cost due to chicken noise and smell, and the need to frequently skim feathers from his pool worth $500.

Cost to Mr. Adams= $500

Mr. Brown values the ability to keep his chickens at $400.

Benefit to Mr. Brown = $400

Here cost is greater than benefit.

Benefit – Cost = $400 - $500 = - $100 (negative)

Overall, there is a loss of $100.

(ii). The chicken coop is moved

It would cut the value of Mr. Adams utility loss from $500 to $250.

So benefit to Mr. Adams = $500 - $250 = $250

Cost to Mr.Brown to move his chicken coop to the other side of the yard = $350

Here again cost is greater than benefit.

Benefit – Cost = $250 - $350 = - $100 (negative)

Overall, there is a loss of $100.

(iii). Brown gives up raising chickens

Mr. Brown values the ability to keep his chickens at $400.

So, Cost to Mr. Brown = $400

It would be worth $500 to Mr. Adams to be free of the chicken noise and smell, and the need to frequently skim feathers from his pool.

Benefit to Mr. Adams = $500.

Here, benefit is greater than cost.

Benefit – Cost = $500 - $400 = $100 (positive).

Overall, there is a benefit of $100.

So the socially efficient outcome is that Mr. Brown gives up raising chicken.

(4) d. Assume that after discussing the situation and consulting lawyers, Adams and Brown learn that the law in their city is unclear regarding nuisance due to neighbor’s chickens. So, they go to court. The judge rules that Brown has every right to raise chickens and keep the coop where it is. Assuming that there are no transaction costs to bargaining between Brown and Adams, what will be the final outcome of the situation after this decision? Explain your answer.

(i). No change is made

(ii) The chicken coop is moved

(iii). Brown gives up raising chickens

Since the judge has ruled that Brown has every right to raise chickens and keep the coop where it is. So Brown will not make any sacrifice if not paid as he has the legal right to keep chickens.

Now, It is worth $500 to Mr. Adams to be free of the chicken noise and smell, and the need to frequently skim feathers from his pool. Mr. Brown values the ability to keep his chickens at $400.

Now if Mr. Adam and Mr. Brown bargain and if Mr. Adam pays Mr. Brown some money more than $400 and less than $500, so that Mr. Brown gives up raising chicken then both of them will benefit. Mr. Adam will not pay more than $500, as it costs $500 to Mr. Adams if Mr. Brown keeps chicken. Then, the third option will be selected.