Question

3. (10) The Coase Theorem (Chapter 4)

(This is a modified version of the James Meade example referred to in the book.) A beekeeper and the owner of an orange orchard have a synergistic relationship. The beekeeper benefits from putting his beehives in the orchard since his bees make honey from the orange blossom pollen. The orchard owner benefits from having the beehives in his orchard since the bees pollinate his trees. There is a reciprocal positive externality.

            The table below gives the dollar benefit to the beekeeper and the orchard owner as a function of the number of beehives that the beekeeper places in the orchard, before any transfer between them.   Bargaining is costless.

beehives	0	1	2	3	4	5	6	7
beekeeper(s)	0	4	8	11	10.5	7	3	-1
orchard	0	1	2	3	4	5	6	7
sum	0	5	10	14	14.5	12	9	6

a) (2)   State the book's version of the Coase Theorem.

b) (2)   What is the efficient number of beehives to have in the orchard?

Assume that the above table is common knowledge to both the orchard owner and beekeeper, that bargaining is costless, and that there are no other orchards or beehive owners.

c) (2) Starting with the situation where there are no beehives in the orchard, explain in broad terms how the bargaining between the beekeeper and the orchard owner might proceed to reach the efficient outcome.

d) (2)   Whether the beekeeper pays the orchard owner or vice versa and how much depends on the bargaining power of the two parties. Suppose, for the sake of argument, that the orchard owner has all the bargaining power. How much would the beekeeper pay the orchard owner to put her beehives in the orchard?

e) (2)   Suppose now that there are two beekeepers. Describe briefly in broad terms how this would change the bargaining problem.

f) (2)    Return to d) but, instead of assuming that the above table is common knowledge to both the beekeeper and the orchard owner, suppose that, for each number of beehives, the orchard owner believes incorrectly that the beekeeper's profits would be twice as much as given in the table. Explain briefly how this misperception would disrupt the bargaining.

Answer 1