Imagine that a rancher who raises steers and a farmer who grows crops operate right next to each other. The problem is that the steers do some damage to the farmers crops, as described in the table below.
# of steers Marginal private cost Marginal crop damage
1 $100 $25
2 $200 $50
3 $300 $75
4 $400 $100
5 $500 $125
Imagine that the price of steers is $410.
What is the socially optimal or efficient number of steers for the rancher to raise?
Assume that rancher has the right to raise as many steers as she wants and bears no liability for damage done to the farmer's crops. How can Coasian bargaining lead to the socially optimal outcome? What is the possible range of values of the payment?