The verification of my solution
Zero transaction cost:


It is correct that the resulting herd will be $\$7,500$, but the transfer from Smith to Jones is not necessarily $\$3,000.$  For instance, the negotiation may result in the transfer amount of $\$4,000$, in which case Smith will be indifferent between producing the ``full-size'' herd and cutting it down by half as $\$7.500 - \$4,000 = \$3,500$. The resulting transfer depends on the negotiation powers of the parties and can be anything between $\$3,000$ and $\$4,000$. 


  High transaction cost:


Notice that your decision as a judge should depend on the value of the transaction cost.  Suppose the transaction cost is $\$4,000$, then what would be your decision? Can (or should) you make Smith indifferent in this case? Hope this will help you with the solution.