# Back in the old days, a railway ownedtracks that ran between

Back in the old days, a railway ownedtracks that ran between two small cities. Several farms were located alongsidethe tracks. The steam engines used in those days sometimes threw off sparks,which would cause crops beside the tracks to catch fire. The specific facts ofthe situation are as follows:The cost of raising crops in the acreagewithin range of the sparks was \$100 per year.The market value of the crops grown on landwithin range of sparks (if there were no fires) was \$130 per year.The engine that pulled the trains betweenthe two towns could be fitted with a device that eliminated spark damage (nomatter how many round trips it took) at a cost of \$70 per year.The relationship between the number ofround trips scheduled daily by the railway, the costs and revenues of therailway, and the annual amount of spark damage if crops were planted next tothe tracks are described in the following table (you have enough information tofill in the last column):Daily Round Trips Total Cost Marginal CostTotal RevenueMarginal RevenueTotal Crop destruction from trainsMarginal Crop destruction 1\$50\$50\$100\$100\$202\$100\$50\$180\$80\$403\$150\$50\$240\$60\$554\$200\$50\$280\$40\$601. Assume first that transaction costs arehigh enough to prevent bargaining between the railway company and the farmers,and that the railway has no legal liability for the crops it destroys.a. How many round trips per day will therailway schedule? Why? Will it purchase the spark reducing device? Why or whynot? b. What is the market value of the cropsthat will be harvested each year (that is, grown and not burned) in the landwithin range of the sparks? Explain.2. Now, assume that transaction costs arehigh enough to prevent bargaining, and that the railway is given legalliability for the crops it damages (that is, it must compensate farmers for themarket value of crops that are destroyed by fires).a. How many round trips per day will therailway schedule? Why? Will it purchase the spark reducing device? Why or whynot?b. What is the market value of the cropsthat will be harvested each year (that is, grown and not burned) in the landwithin range of the sparks? Explain.c. Does this liability arrangement lead togreater social output than the arrangement in question 1? (remember that the addition of the combined railway-farming operationto social output is equal to the combined profits of the farmers and therailway).3. Assume now that all the croplandadjacent to the railway is owned by one farmer, who can negotiate costlesslywith the railway owner. Also assume that the railway has liability for cropdamage. How many trains will be run and what will be the market value of cropsharvested from land adjacent to the railway? If a bargain is required to bringthis outcome about, describe a plausible bargain that would do so. 4. Compare the efficiency of the outcome inquestion 3 to the efficiency of a law that required the railway to purchase thespark control device.5. In rural Appalachia,many people live in small communities of modest-sized houses built on thenarrow flood plains of streams. Surrounding these valley communities are steep,wooded mountainsides. Logging companies operate on these mountainsides. Occasionallythe small streams flood, causing significant property damage in thecommunities. Many people who live in these rural communities believe that theactivities of the logging companies on the mountain (building dirt roads andremoving trees) have increased the amount of water that runs off the mountainsinto the streams after a storm, and has thus increased the frequency andseverity of damaging floods. This has led some homeowners to sue logging companiesfor the cost of replacing or repairing houses and other possessions damaged inthe floods.Assume that current logging methods doindeed increase the frequency and severity of floods in Appalachia:a. Describe this situation in terms of anexternalityb. Describe this situation in terms ofconflicting property rights claims.c. Describe the tradeoff society faces indeciding how to settle this matter.