Problems for Chapter 5

I. The law protects some entitlements (such as my ownership of my car) with a property rule, and others (such as my right not to have people run into my car) with a liability rule.

A. Briefly expain the difference between the two kinds of rules.

B. What are the advantages of each? How should we decide which to use in each case?


II. A railroad company runs engines that throw sparks which start fires in the fields of the hundred farmers who live along the rail line. At some cost, the railroad can prevent the fires by installing a spark arrester. At some cost, the farmers can prevent the fires by replacing the wheat along the rail line with clover.

A. Assume no transactions between farmers and railroad company are possible. The railroad has the legal right to throw sparks without being liable for damages. Under what circumstances will this give the efficient result? Under what circumstances will it not give the efficient result?

B. Transactions among the parties are possible and costless; answer as in A.

C. Transactions among the parties are possible but not costless. The railroad has the right to throw sparks; switching to clover costs slightly more than putting on the spark arrester. What happens? Explain.

D. The legal rule is that the railroad is liable for damage only if it is negligent. The spark arrester costs more than the damage done by the sparks, so the railroad, in failing to install the spark arrester, is not negligent and is not liable for fires started each time it runs a train. Is the result efficient? Discuss briefly.


III. A railroad runs through farming country; there is one railroad company and a hundred farmers. The railroad's locomotives throw sparks which sometimes start fires, doing $100,000 worth of damage each year. The railroad company could prevent the fires by installing spark arresters on its locomotives at a cost of $50,000/year. The farmers could prevent the fires by switching from wheat to clover, costing them $70,000/year in lost income.

A. What is the efficient outcome?

B. No transactions are possible between farmers and railroad. What happens if:

1. The railroad is free to throw sparks.

2. The railroad must pay the farmers damages for the fires caused by its sparks.

3. The railroad must pay a fine to the government for the damage due to the fires caused by its sparks.

In each case, is the result efficient?

C. Answer the same questions, assuming that transactions are possible and costless.

D. Transactions are possible but not costless. What transactional problems, if any, might prevent the parties from getting to the efficient outcome in each case?


IV. Airplanes make noise that disturbs residents of homes near the flight path. Suppose that the airline can, at some cost, reduce the noise to an insignificant level. Home owners can get the same reduction by soundproofing their homes. For simplicity ignore the possiblity of different levels of noise reduction--there either is or is not a noise problem.

There is one airline; it owns the airport. There are two thousand homes near the flight path. Reducing noise costs the airline a million dollars a year. Sound proofing a house costs $400/year. Airport noise (if there is neither soundproofing nor noise reduction by the airline) reduces the value of the house to its owner by $600/year

A. What is the efficient solution?

The airline should (reduce/not reduce) noise:

The homeowners should (soundproof/not soundproof:

In answering parts B and C, describe first what happens if there is no bargaining between airline and homeowners, and then whether bargaining will change the outcome. Explain briefly.

B. The airline has no legal obligation to reduce noise.

C. Each homeowner has the right to a reasonable level of quiet, so if the airline does not reduce noise, it must pay each home owner for any resulting reduction in the value of his house.