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Coase Farm grows soybeans near property owned by Taggat Railroad. Taggat can build zero one or two r

Question: Coase Farm grows soybeans near property owned by Taggat Railroad. Taggat can build zero one or two railroad tracks adjacent to Coase Farm, yielding a net present value of $0, $9 million, or $12 million.

Value of Taggart Railroad (in millions) as a Function of the Number of Train Tracks (before any damages)

Zero tracks $0

One track $9

Two tracks $12

Coase Farm can grow soybeans on zero one or two fields yielding a net present value of $0, $15 million or $18 million before any environmental damages inflicted by Taggart trains. Environmental damages inflicted by Taggart’s trains are $4million per field per track. Coase Farms payoffs as a function of the number of fields it uses to grow soybeans and the number of tracks that Taggart builds are shown below.

Value of Coas Farm (in millions) as a Function of the Number of Fields Planted and the Number of Train Tracks

Zero Fields One Field Two Fields

Zero Tracks $0 $15 $18

One Track $0 $11 $10

Two Tracks $0 $7` $2

It is prohibitively expensive for Taggart Railroad and Coase Farm to enter into a long term contact regarding either party’s use of it s land.

a. Suppose Taggart Railroad cannot be held liable for the damages its tracks inflict on Coase Farm. Show that Taggart Railroad will build two tracks and Caose Farm will pant soybeans on one field.

b. Suppose Taggart Railroad can be held fully liable for the damages that its tracks inflict on Case Farm. Show that Taggart Railroad will build one rack and Casoe Farm will pant soybeans on two fields.

c. Now suppose Taggart Railroad and Coase Farm merge. Show that the merged firm will build one track and plant soybeans on one field.

d. What are the implications or the merger for the organizational architecture of the newly merged firm in terms of decision rights, performance measurements, and employee compensation?

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