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Question
A farmer notices that a neighboring rancherʹs cattle are wandering and destroying some of his crops. The farmer decides to offer a payment to the rancher if the rancher will reduce the size of his herd. By doing so, the farmer
A) can be sure that the size of the herd will be reduced and the size of his own harvest will be increased.
B) indicates to the rancher that there is an opportunity cost to the wandering of the cattle, and thereby internalizes the externality.
C) inadvertently bears the costs of the externality when the rancher should be liable for the costs.
D) informs the rancher that the cattle have destroyed crops, which should induce the farmer to build a fence in order to maintain good relations.
Answer
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