Reference no: EM13148396

You own an alligator farm. Your neighbor breeds poodles. Alligators love poodles and eat them every chance they get. Occasionally one of your alligators escapes and eats some of your neighbor’s poodles. The number of poodles that get eaten increases with the number of alligators you breed. The marginal damage to your neighbor's business is a function of how many alligators you keep and the amount of money spent on a fence that separates your properties: MD = 0.5×A – F, where MD is equal to the marginal damage the alligators do in dollar terms, A is the number of alligators you have and F is the amount of money spent on a fence to separate the two properties. The marginal net benefit you receive from your farm is a function of the number of alligators you breed: MB = 100. (This is a fancy way of saying that each alligator has a net market value of $100 to you.) a) Describe the externality in this problem. b) Graph the marginal damage function assuming no expenditure on a fence (F = 0). Add to the graph the marginal benefit curve of raising alligators. c) Liability Law: Assume that you must compensate your neighbor for any damage your alligators do to her poodles. If there is no fence (F=0) how many alligators will you keep? What is the marginal damage done by the last alligator? What is the total damage to the poodle farmer? And, what are your profits after you compensate your neighbor? (show your work for full credit) Assume a fence is available on the market for $1,000 (i.e. F=1000). d) If alligator farmers are liable for damage, is it economically efficient for them to purchase the fence? Explain. e) If alligator farmers are not liable (and poodle breeders are responsible for paying alligator farmers to reduce the impact they have on poodle ranches) is it economically efficient for poodle breeders to purchase the fence? Explain.