Answered: 1)If Mr. Ramesh has the property rights…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Choice of a neighbourhood is a function of economic parameters like income, wealth, and occupation. Social factors such as religion, caste, other group identity etc. also influence the decision of where to live. Demographic factors such as constituents of the family and number of dependent members are also important. Family with more number of kids is likely to prefer housing in an area with educational institutions. Similarly, family with more number of elderly will prefer a place where medical assistance can be quickly reached. Choice of neighbourhood becomes extremely important, as it affects the quality of life in a large way. There are external effects of neighbour’s behaviour on one’s life style. If the neighbours are very social and of high moral values, there are no clashes and disturbances. However, if one is not lucky enough to have a good and understanding neighbour, things can come to a level, where there can be fights and legal suites. One such example happened in my society recently. Mr. Ramesh Tendulkar and Mr. Suresh Raina are neighbours to each-other. Both are from the same occupation, so preferred to stay next to each-other. However, it turned out later that they do not enjoy each-other’s company as much as was expected, due to their varied personal interests. Mr. Ramesh likes gardening. He has a garden in his bungalow, where he plants seasonal trees every season with extreme care. The cost of planting trees in a season is Rs. 500. I had once asked, why don’t you plant perennial trees, which will give you permanent benefit. He said, “No seasonal trees have flavours and smells suitable for a season. I get benefit equal to Rs. 1000 from my seasonal trees every season. Mr. Suresh, on the other hand, is an animal lover. He owns a dog, a big German shepherd, named ‘Pluto’. Houses in our society do not have fences installed. Therefore one can easily access the garden area of any house. Mr. Suresh’s ‘Pluto’ goes to Mr. Ramesh’s garden and digs and spoils the trees. The matter became so grave, that the society had to call a special meeting to discuss and find a solution. I offered my advise, saying I know ‘Coase Theorem’, which can be applied in this situation. The society registrar asked me, How. I suggested we need to define ‘rights’. I need details like cost of fencing and cost of buying a leash. The registrar provided me with the details. If Mr. Suresh buys a leash for the dog, the cost of the leash isRs. 50. Mr. Ramesh can also install a fence around his garden, the cost for him would be Rs. 100.

1)If Mr. Ramesh has the property rights for growing trees, what would be the socially optimum outcome?

2)If Mr. Suresh has the property rights to keep his dog open, what would be the outcome? Is there any possibility to bargain?

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