Suppose that a bee-keeper locates next to an orchard that has 20 acres. Each hiv

Question

Suppose that a bee-keeper locates next to an orchard that has 20 acres. Each hive can pollinate 1/4 acres of trees which raises the value of output on that quarter acre by $40.

) Suppose that the price at market for the honey that comes from one hive is $50 (5) and the marginal costs for a hive are given by MC = 30 + .5Q where Q is the number of hives employed. If we do not have any bargaining, how many hives will the beekeeper have and what portion of the orchard will be pollinated? (b) Suppose now that the orchard owner can make a deal with the beekeeper. What (5) is the maximum amount the orchard owner will pay per hive to get him to install extra hives. How much will the owner have to actually pay to prompt the beekeeper to get enough hives to pollinate the entire orchard (with no excess). (c) Discuss the coase theorem as it relates to this problem.

Explanation / Answer

In case of no bargaining , Beekeeper will equate his MC to the price, to maximize his profit.

So, MC = P

30 + .5Q = 50

.5Q = 20

Q = 40.

b. In case of bargaining

The maximum amount the orchard owner will be will to give is equal to the maximum benefit that he will get by increase of beehives

So, the maximum amount the orchard owner will pay per hive to get him to install extra hives = increase in value of output due to hive = $40.

c. The actual amount the owners has to pay will be equal to the maginal cost of pollinating extra hives.

So, Number of bee hives required to pollinate 20 acres = 20*4 = 80 hives

Extra hives required = 80 - 40 = 40 Hives

Extra cost for 40 more hives = 30*40 + 0.5*(40)^2 = 1200 + 800 = $2,000

So,  $2,000 is the amount owner has to pay.

Coase theoram says if the property rights are well defined , regardless of how has those rights,and the bergaining costs are low, then the problem of externality could be eliminated with the help of bergainging between the agents.

As it can be seen here , because of bargaining between owner and Bee keeper , the externality is eliminated.

If you don't understand anything, then comment, I will revert back on the same.

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