Example of farmer and railroad tracks to explain bargaining

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Ronald Coase used the example of a farmer and railroad tracks to explain bargaining. Sparks from trains running on tracks near farmland have the potential to set off fires in the fields. To avoid this, railroad companies would either have to stop running trains on tracks along fields or incur a cost in fixing a spark arrester along these tracks. Farmers could avoid the cost of fires by leaving land near railroads empty. Suppose that the cost of preventing a fire was equal to $20,000 for a railroad company and not having a fire in the field was worth $10,000 for a farmer. Consider the case where the law stipulated that railroads could not throw sparks along fields. What would be the outcome? Why?

Reference no: EM131009956

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