A lawyer and an economist are neighbors. During a storm, a large branch from atreeon the lawyer's property breaks off, causing damage to the economist's fence (which separates the two properties) and the economist's garage roof. Although the fence belongs to the economist, both neighbors benefit from the presence of the fence, albeit to different degrees (explained below).

After seeing the fallentreeand the damage to his fence and garage, the economist calls the lawyer to let her know that her tree damaged his property. The lawyer (correctly) points out that, under Rhode Island law, the lawyer is not responsible for the damage that her tree caused to the economist's property.

Here are some other relevant details:

• The economist has the option of filing an insurance claim. The economist's insurance deductible is $2500, which means that the economist will have to pay $2500 if he files a claim to get the insurance company to pay for the damage.
• The cost of the fence repair is $1500, and the cost of the garage roof repair is $500. So, since these costs are less than the insurance deductible, going through insurance is not an option.
• The damage is to the top of the fence, so it poses no security risk and does not erode the integrity of the boundary between the two property lines.
• The damaged part of the fence is blocked bysmall treeson the economist's side and is barely visible. The damaged fence therefore has no impact on the economist's quality of life.
• The damaged part of the fence is fully visible in the lawyer's yard, and serves as a backdrop for a carefully manicured flower garden.

Respond to the following questions and carefully describe your reasoning for each one:

2. What will happen in a world with 0 transaction costs?
4. What do you see as the important sources of transaction costs in this example?
6. Why might someone expect the economist to be the one to pay for the fence in the real world? Why might someone expect the lawyer to be the one to pay for the fence in the real world? Who doyouthink will pay for the fence in the real world?
8. Whoshould pay for the fence?

Answer rating: 100% (QA)

Answer In a world with 0 transaction costs Without transaction costs the economist would likely request that the lawyer cover the cost of repairing th... View the full answer