Question

A person named Leslie lives in Urbana and likes to raise goats (G) for milk, grass mowing, and company. Unfortunately, her neighbor named Lee finds the noise of the goats very annoying. The total welfare of each neighbor as a function of the number of goats that Leslie keeps is:

Number of Goats	0	1	2	3	4	5
Welfare of Lee	140	100	60	40	20	0
Welfare of Leslie	5	20	30	40	50	60

a) At first, the city of Urbana allows people to raise livestock, so Leslie has a right to raise goats.

i) [3 points] If Leslie and Lee do not negotiate, how many goats will Leslie keep?

ii) [3 points] If Leslie and Lee can negotiate about this dispute, how many goats will Leslie keep after the negotiations? What is the total welfare gain resulting from the negotiations?

iii) [3 points] Which neighbor will pay the other one to accept this arrangement, and how large will the payment be? (Calculate a range of possible payments).

iv) [3 points] Suppose Urbana changes the rule, and now people can’t raise livestock without written permission from their current neighbors. How does that change your answers to parts (ii/iii) about the number of goats after negotiation, which neighbor pays, and how big the payment is? Explain briefly - no calculations are necessary.

Answer 1