THE PROBLEM OF SOCIAL COST subdivision of it. Suppose, for example, that the cattle have a well-defined route, say, to a brook or to a shady area. In these circumstances, the amount of damage to the crop along the route may well be great and if so, it could be that the farmer and the cattle- raiser would find it profitable to make a bargain whereby the farmer would agree not to cultivate this strip of land But this raises a further possibility. Suppose that there is such a well defined route Suppose further that the value of the crop that would be ob- tained by cultivating this strip of land is $10 but that the cost of cultivation is $11. In the absence of the cattle-raiser, the land would not be cultivated However, given the presence of the cattle- raiser, it could well be that if the strip was cultivated, the whole crop would be destroyed by the cattle. In which case, the cattle-raiser would be forced to pay $10 to the farmer. It is true that the farmer would lose $1. But the cattle raiser would lose $10. Clear- ly this is a situation which is not likely to last indefinitely since neither party would want this to happen. The aim of the farmer would be to induce the cattle-raiser to make a payment in return for an agreement to leave this land ultivated. The farmer would not be able to obtain a payment greater than the cost of fencing off this piece of land nor so high as to lead the cattle- raiser to abandon the use of the neighbouring property. What payment would in fact be made would depend on the shrewdness of the farmer and the cattle- raiser as bargainers. But as the payment would not be so high as to cause the cattle-raiser to abandon this location and as it would not vary with the size of the herd, such an agreement would not affect the allocation of resources but would merely alter the distribution of income and wealth as between the cattle-raiser and the farmer. I think it is clear that if the cattle- raiser is liable for damage caused and the pricing system works smoothly, the reduction in the value of production elsewhere will be taken into account in computing the additional cost involved in increasing the size of the herd. This cost will be weighed against the value of the additional meat production and, given perfect competition in the cattle industry, the allocation of resources in cattle-raising will be optimal. What needs to be emphasized is that the fall in the value of production elsewhere which would be taken into account in the costs of the cattle-raiser may well be less than the damage which the cattle would cause to the crops in the ordi nary course of events. This is because it is possible, as a result of market transactions, to discontinue cultivation of the land. This is desirable in all to change his crop(since this would reduce damage liability from $3 to $1)and it would be profitable for the farmer to do so if the amount received ore than $1(the redue tion in his return caused by switching crops). In fact, there would be room for a mutuall bargain in all cases in which a change of crop would reduce the amount of more than it reduces the value of the crop(excluding dam which a change in the crop cultivated would lead to an increase in the value ofTHE PROBLEM OF SOCIAL COST 5 subdivision of it. Suppose, for example, that the cattle have a well-defined route, say, to a brook or to a shady area. In these circumstances, the amount of damage to the crop along the route may well be great and if so, it could be that the farmer and the cattle-raiser would find it profitable to make a bargain whereby the farmer would agree not to cultivate this strip of land. But this raises a further possibility. Suppose that there is such a well￾defined route. Suppose further that the value of the crop that would be ob￾tained by cultivating this strip of land is $10 but that the cost of cultivation is $11. In the absence of the cattle-raiser, the land would not be cultivated. However, given the presence of the cattle-raiser, it could well be that if the strip was cultivated, the whole crop would be destroyed by the cattle. In which case, the cattle-raiser would be forced to pay $10 to the farmer. It is true ,tha,t the farmer would lose $1. But the cattle-raiser would lose $10. Clear￾ly this is a situation which is not likely to last indefinitely since neither party would want this to happen. The aim of the farmer would be to induce the cattle-raiser to make a payment in return for an agreement to leave this land uncultivated. The farmer would not be able to obtain a payment greater than the cost of fencing off this piece of land nor so high as to lead the cattle￾raiser to abandon the use of the neighbouring property. What payment would in fact be made would depend on the shrewdness of the farmer and the cattle￾raiser as bargainers. But as the payment would not be so high as to cause the cattle-raiser to abandon this location and as it would not vary with the size of the herd, such an agreement would not affect the allocation of resources but would merely alter the distribution of income and wealth as between the cattle-raiser and the farmer. I think it is clear that if the cattle-raiser is liable for damage caused and the pricing system works smoothly, the reduction in the value of production elsewhere will be taken into account in computing the additional cost involved in increasing the size of the herd. This cost will be weighed against the value of the additional meat production and, given perfect competition in the cattle industry, the allocation of resources in cattle-raising will be optimal. What needs to be emphasized is that the fall in the value of production elsewhere which would be taken into account in the costs of the cattle-raiser may well be less than the damage which the cattle would cause to the crops in the ordi￾nary course of events. This is because it is possible, as a result of market transactions, to discontinue cultivation of the land. This is desirable in all to change his crop (since this would reduce damage liability from $3 to $1) and it would be profitable for the farmer to do so if the amount received was more than $1 (the reduc￾tion in his return caused by switching crops). In fact, there would be room for a mutually satisfactory bargain in all cases in which a change of crop would reduce the amount of damage by more than it reduces the value of the crop (excluding damage)-in all cases, that is, in which a change in the crop cultivated would lead to an increase in the value of production