Managerial Economics 13th Edition by James McGuigan,Charles Moyer,Frederick Harris

Exercise 2

A sheep rancher leased the mineral rights beneath her grazing land to an oil company. She fears that discharges from the oil wells will pollute her underground water resources. Consequently, the contract for the sale of mineral rights requires that the rancher and the oil company reach a mutually agreeable solution to the water contamination problem should it occur. If this bargaining fails to reach a onclusion acceptable to both sides, the mineral rights lease will be terminated automatically, and the rancher will be required to return a portion of the leaseproceeds to the oil company. The portion that must be returned to the oil company is to be determined through a process of binding arbitration. Discuss likely outcomes should this problem arise.