Invariance. With zero transaction costs, the farmer fences the cornfield rather than the rancher fencing the ranchregardless
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To illustrate, assume that farmers like to eat more corn and less beef, whereas ranchers like to eat more beef and less corn. Assume that farmers and ranchers own their own land, that transaction costs are zero, and that fence is costly relative to their incomes. The change from “ranchers’ rights” to “farmers’ rights” will increase the income of farmers and decrease the income of ranchers. Consequently, the demand for corn will increase, and the demand for beef will decrease. Greater demand for corn requires the planting and fencing of more cornfields. Thus, the change in law causes the building of more fences. Remember the distinction between “price effects” and “income effects” in demand theory? Can you use these concepts to explain this example?
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