Consider the example of the rancher (R) and the farmer (F). As in class, the cattle will cause $100 damage to F’s crops, if left unchecked. It would cost R $75 to fence his range, and it would cost F $50 to fence her field. The rancher’s business earns him $500 in profits, and the farmer earns $300 in profits. Consider the three following legal rules:

1. R has the right to operate his business

2. F is entitled to compensatory damages from R.

3. F is entitled to an injunction against R.

For each rule, discuss whether efficiency will be achieved when...

a) transaction costs are high enough to preclude bargaining. Identify the payoffs to each player, and the joint payoffs earned by the players under each rule.

b) transaction costs are not high enough to preclude bargaining. In this case, specify the threat values for each player, the surplus that can be gained through bargaining, what the bargain will be, and the payoffs gained by each player after the bargain.. First, identify the socially efficient outcome, and then indicate whether each legal rule achieves efficiency.