THE PROBLEM OF SOCIAL COST raiser would reduce his herd to 2 steers, up to $s if the herd were reduced to I steer and would pay up to $6 if cattle-raising was abandoned. The cattle- raiser would therefore receive $3 from the farmer if he kept 2 steers instead of 3. This $3 foregone is therefore part of the cost incurred in keeping the third steer. Whether the $3 is a payment which the cattle- raiser has to make if he dds the third steer to his herd (which it would be if the cattle- raiser was liable to the farmer for damage caused to the crop) or whether it is a sum of money which he would have received if he did not keep a third steer(which it would be if the cattle- raiser was not liable to the farmer for damage caused to the crop)does not affect the final result. In both cases $3 is part of the cost of adding a third steer, to be included along with the other costs. If the increase in the value of production in cattle-raising through increasing the size of the herd from 2 to 3 is greater than the additional costs that have to be incurred(including the $3 damage to crops), the size of the herd will be in- the cattle-raiser is liable for damage caused to the crop or no same wh creased. Otherwise it will not The size of the herd will be the same whether It may be argued that the assumed starting point-a herd of 3 steers-was bitrary. And this is true. But the farmer would not wish to pay to avo crop damage which the cattle-raiser would not be able to cause For example, the maximum annual payment which the farmer could be induced to pay ould not exceed $9, the annual cost of fencing. and the farmer would only be willing to pay this sum if it did not reduce his earnings to a level that would cause him to abandon cultivation of this particular tract of land. Furthermore the farmer would only be willing to pay this amount if he believed that, in the absence of any payment by him, the size of the herd maintained by the cattle raiser would be 4 or more steers. Let us assume that this is the case. Then the farmer would be willing to pay up to $3 if the cattle raiser would reduce his herd to 3 steers, up to $6 if the herd were reduced to 2 steers, up to $8 if one steer only were kept and up to $9 if cattle-raising were abandoned It will be noticed that the change in the starting point has not altered the amount which would accrue to the cattle-raiser if he reduced the size of his herd by any given amount. It is still true that the cattle-raiser could receive an additional $3 from the farmer if he agreed to reduce his herd from 3 steers to 2 and that the $3 represents the value of the crop that would be destroyed by adding the third steer to the herd. Although a different belief on the part of the farmer (whether justified or not)about the size of the herd that the cattle-raiser would maintain in the absence of payments from him may affect the total payment he can be induced to pay, it is not true that this different belief would have any effect on the size of the herd that the cattle-raiser will actually keep. This will be the same as it would be if the cattle-raiser had to pay for damage caused by his cattle, since a receipt foregone of a given amount is the equivalent of a payment of the same amount It might be thought that it would pay the cattle-raiser to increase his herdTHE PROBLEM OF SOCIAL COST 7 raiser would reduce his herd to 2 steers, up to $5 if the herd were reduced to 1 steer and would pay up to $6 if cattle-raising was abandoned. The cattle￾raiser would therefore receive $3 from the farmer if he kept 2 steers instead of 3. This $3 foregone is therefore part of the cost incurred in keeping the third steer. Whether the $3 is a payment which the cattle-raiser has to make if he adds the third steer to his herd (which it would be if the cattle-raiser was liable to the farmer for damage caused to the crop) or whether it is a sum of money which he would have received if he did not keep a third steer (which it would be if the cattle-raiser was not liable to the farmer for damage caused to the crop) does not affect the final result. In both cases $3 is part of the cost of adding a third steer, to be included along with the other costs. If the increase in the value of production in cattle-raising through increasing the size of the herd from 2 to 3 is greater than-the additional costs that have to be incurred (including the $3 damage to crops), the size of the herd will be in￾creased. Otherwise, it will not. The size of the herd will be the same whether the cattle-raiser is liable for damage caused to the crop or not. It may be argued that the assumed starting point-a herd of 3 steers-was arbitrary. And this is true. But the farmer would not wish to pay to avoid crop damage which the cattle-raiser would not be able to cause. For example, the maximum annual payment which the farmer could be induced to pay could not exceed $9, the annual cost of fencing. And the farmer would only be willing to pay this sum if it did not reduce his earnings to a level that would cause him to abandon cultivation of this particular tract of land. Furthermore, the farmer would only be willing to pay this amount if he believed that, in the absence of any payment by him, the size of the herd maintained by the cattle raiser would be 4 or more steers. Let us assume that this is the case. Then the farmer would be willing to pay up to $3 if the cattle raiser would reduce his herd to 3 steers, up to $6 if the herd were reduced to 2 steers, up to $8 if one steer only were kept and up to $9 if cattle-raising were abandoned. It will be noticed that the change in the starting point has not altered the amount which would accrue to the cattle-raiser if he reduced the size of his herd by any given amount. It is still true that the cattle-raiser could receive an additional $3 from the farmer if he agreed to reduce his herd from 3 steers to 2 and that the $3 represents the value of the crop that would be destroyed by adding the third steer to the herd. Although a different belief on the part of the farmer (whether justified or not) about the size of the herd that the cattle-raiser would maintain in the absence of payments from him may affect the total payment he can be induced to pay, it is not true that this different belief would have any effect on the size of the herd that the cattle-raiser will actually keep. This will be the same as it would be if the cattle-raiser had to pay for damage caused by his cattle, since a receipt foregone of a given amount is the equivalent of a payment of the same amount. It might be thought that it would pay the cattle-raiser to increase his herd