Question

2. Assume that the grazing pasture described in the in-class portion (Question 3) can now be used by any farmer in the village. Assume that there are a large number of farmers, each deciding (independently of the other farmers) on how many cows to apply to the grazing area. No farmer can be excluded from grazing. a) What will each farmer's objective be? b) Using the terminology of your text and/or our in-class discussion, how would you characterize this resource? Does this situation characterize a property rights regime associated with efficiency? c) Using the above information, and information provided in question 3 of the in-class portion, how many cows (approximately) will you expect to be grazing on the pasture in this situation? [Hint: Set Average Revenue Average Cost.] d) is the number of cows calculated in part (c) an efficient grazing level? Explain.

Answer 1

Step-by-step explanation:

a) Each farmer's objective in this scenario would be to maximize their individual benefit or profit from grazing cows on the pasture. They would aim to find the optimal number of cows that would yield the highest returns or benefits given the resources available.

b) This resource can be characterized as a common-pool resource. It is a resource that is accessible to all farmers in the village, and each farmer can use it without exclusion. However, since there are a large number of farmers making independent decisions, the resource may be prone to overuse or depletion if not managed properly. In this situation, the property rights regime is not associated with efficiency because there are no clear ownership or control rights over the resource.

c) To estimate the number of cows expected to be grazing on the pasture, we need to set Average Revenue (AR) equal to Average Cost (AC). This equilibrium condition determines the profit-maximizing level of cow grazing. The number of cows grazing on the pasture will depend on the specific cost and revenue functions provided in question 3 of the in-class portion.

d) The efficiency of the grazing level calculated in part (c) depends on whether it corresponds to the socially optimal level of grazing. If the number of cows determined in part (c) takes into account the costs and benefits to society as a whole, then it would be considered an efficient grazing level. However, if the number of cows only maximizes individual profits without considering potential negative externalities or resource depletion, it may not be an efficient level. The presence of multiple independent farmers and lack of property rights can make it challenging to achieve an efficient grazing level without appropriate management mechanisms in place.