Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 7

Wile E. Coyote purchases a variety of equipment with which to catch roadrunners. Invariably he finds that the equipment fails to work as promised. For example, the Acme Road Runner Rocket he purchased misfired and pushed him backwards over a steep cliff, the Acme Flamethrower only singed his whiskers, and the spring-mounted net ended up capturing him instead of the roadrunner.
a. Show how the Coase theorem would apply to transactions between predators and companies manufacturing roadrunner-catching equipment. In the full information case, would the equipment have efficient operating characteristics regardless of how legal liability is defined?
b. Many predators, including Mr. Coyote, are rather careless in how they use their equipment. If this carelessness is not affected by assignment of legal liability and if it is fully understood by producers, would its presence change your answer to part a?
c. Suppose predators became even more careless when they knew manufacturers would have legal liability for any injuries. How would this affect your answer to part a?
d. Assume that a single firm (the Acme Manufacturing Company) has a monopoly in the supply of roadrunner-catching equipment. How, if at all, would this change your answer to part a?
Note: ( This question was motivated by the great comic essay by Ian Frazier, Coyote v. Acme, New York: Farrar, Straus and Giroux, 1996.)