Consider the case of a sheep farmer who lives next door to an African Safari theme...

Consider the case of a sheep farmer who lives next door to an African Safari theme park with dangerous lions. If the lions come in contact with the sheep, they kill them and eat them, costing the sheep farmer damages of $15,000. However, the theme park can build a fence around the lions for $6000. In the alternative, the sheep farmer can fence off his pasture for $8000. Assume that it costs the sheep farmer and the Safari park each $2000 to hire a lawyer if they have to negotiate an agreement between them. What is the efficient outcome here? Why? Suppose that the Safari Park is granted a right of free roaming so that it does not have to fence off its animals and is not liable for any damages they cause. What is the likely outcome now? Will the sheep farmer and the Safari negotiate? Why or why not? Now suppose that the cost of legal advice drops to $500 in part b). How does that change the likely outcome? Why? Assume the legal rule changes, so that the sheep farmer is granted right to safe grazing. If the Safari is held liable for damages to sheep, what is the likely outcome?

Solutions

Expert Solution

a) If there is no fence by either the park or the farmer,the farmer will face damages of $15,000. The efficient outcome in this scenario would be the farmer fencing off his pasture costing 8,000$.

It is the most efficient outcome as the other possibility would be to negotiate with the park and compensate for the fence around the lions(6000$) but also the legal fees of the 2 lawyers(4000$) Thus the farmer will have to net pay 2000$ for his own lawyer+8000$(To pay the park to build its own fence around the lions for 6000$+2000$ to compensate for the legal fees)=10,000$

b) If the Safari park is granted a right of free roaming, the efficient outcome is still for the farmer to fence off his pasture for 8,000$ so he doesn't face the damages of 15,000$. They will still not negotiate as if they want to negotiate, the farmer will have to pay a total of 10,000$(2,000 to lawyer and 6000+2000 to the park) as seen above for the park to build its own fence.

c) If the cost of legal advice drops to $500,the likely outcome will change and they will negotiate. Now instead of paying $8000 for fencing his own pastures, the farmer can negotiate and pay 7000$ (Although he will be willing to pay upto 7,999$ and the rest over the 7,000$ will go as benefits to the park for a combined net total cost of 7,000$ so it is still more efficient) for the park to fence around the lions. In this case the farmer will have to pay $500 for his own lawyer+6500$ to the park to compensate for building the fence plus the legal fees. This is more efficient than paying 8,000$ for his own fence.

d) If the sheep farmer has the right to safe grazing and the safari is held liable for damages to sheep, the likely outcome is it will fence the lions for 6,000$ so it doesn't have to face the damages of 15,000$. There will be no negotiation as 6,000$ is the least fencing will cost and the park will have to pay much more than that if it wants the farmer to fence off his pasture.

Hope it's clear and helps. Do ask for any clarifications required.

Rahul Sunny answered 1 year ago

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