A buyer hires a manufacturer to build a specialized machine for delivery on a certain date. The value of the machine to the buyer is $2,000, and the price, payable on delivery, is $1,500. Suppose that after the machine is completed but before delivery, a second buyer arrives and offers the manufacturer $2,500 for it.
(a) From a social perspective, who should get the machine?
(b) Calculate the value of expectation damages for the first buyer and show that it gives the seller the correct incentives regarding breach of the original contract.
(c) Suppose the first buyer sought and obtained a specific performance remedy. How will this affect the ultimate ownership of the machine compared to expectation damages? (Assume that the first buyer is aware of the second buyer's offer and that the two buyers can bargain.)
(d) The arrival of the second buyer created a "surplus" of $500 (the excess of his offer over the valuation of the first buyer). Describe how this surplus is divided between the seller and first buyer under the two breach remedies.