Question

As per the Essentials of Economics 4th Edition, the topic the invisible market failures and externalities, In the lecture, we discussed the fable of the bees draw a diagram with the price and quantity of honey which indicates the market equilibrium. Add a new supply curve which shows the efficient equilibrium based on the external benefits to nearby orchards. You should clearly label your diagram and indicate the deadweight loss. Discuss how the fruit growers might use Cosean bargaining to achieve a socially optimal outcome in this context?

Answer 1

Bee Hives helps in pollination of Orchards. But since these benefits are external and owners of orchards do not pay for it. Thus, Bees hive size remains small or it level is not socially optimal.

Following is diagram:

In above diagram, without considering benefits to orchards, The equilibrium output level is Q1. But it does not represents Social demand. External benefits are not considered in such situation.

If external benefits are considered, output or Beehive size must be increased to Q2.

If property rights are clearly defined and bargaining cost does not exist. Then, owner of orchards will pay to owner of Beehive to increase the size of beehive.