Suppose That Company A's Railroad Cars Pass Through Farmer B's

question 86

Multiple Choice

Suppose that Company A's railroad cars pass through Farmer B's corn fields. The railroad causes an externality to the farmer because the railroad cars emit sparks that cause $1,500 in damage to the farmer's crops. There is a special soy-based grease that the railroad could purchase that would eliminate the damaging sparks. The grease costs $1,200. Suppose that the farmer has the right to compensation for any damage that his crops suffer. Assume that there are no transaction costs. Which of the following characterizes the efficient outcome?

• A)The railroad will continue to operate but will pay the farmer $1,500 in damages.
• B)The railroad will purchase the grease for $1,200 and pay the farmer nothing because no crop damage will occur.
• C)The farmer will incur $1,500 in damages to his crops.
• D)The farmer will pay the railroad $1,200 to purchase the grease so that no crop damage will occur.

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Definitions:

Warranty of Title

A guarantee by a seller to a buyer that the seller has the right to sell the property and that there are no undisclosed liens or encumbrances against it.

Stolen Car

A vehicle that has been taken without the owner's consent, often leading to criminal charges against the person in possession.

Breach of Warranty

The failure to fulfill the terms of a promise or guarantee made about the quality or condition of a product or service.

Mixed Sale

Involves a transaction that includes a combination of taxable and nontaxable items or services, often requiring special considerations for tax calculation and reporting.