L12 More Externalities

L12 More Externalities - Chapter 11: Externalities and...

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1 Chapter 11: Externalities and Property Rights A. External costs B. External benefits C. Dealing with externalities 1. Negotiation and the Coase Theorem If beekeepers were not compensated for pollination services, the private outcome would be inefficient Total bee colonies maintained Value ($ per colony) private demand (total honey sales) private marginal cost 30 120 social demand social cost of 30 th colony = $120 external benefit of 30 th colony = $50 social benefit of 30 th colony = $170 • Owner of apple orchard would gain $50 if beekeeper located another colony next to orchard. • So why not offer to pay beekeeper $25? At any number of colonies less than 35, there is a contract that would make both orchard owner and beekeeper better off Total bee colonies maintained Value ($ per colony) private demand (total honey sales) private marginal cost 30 120 social demand 35 benefit to orchard is $50 offer to pay $25 for colony gives orchard $25 more profit, beekeeper $25 more profit At any number of colonies less than 35, there is a contract that would make both orchard owner and beekeeper better off Total bee colonies maintained Value ($ per colony) private demand (total honey sales) private marginal cost 30 120 social demand 35 benefit to orchard is $40 beekeeper must be compensated at least $10 contract to pay $25 for colony gives orchard $15 more profit, beekeeper $15 more profit
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2 • Both orchard owner and beekeeper would be better off • So why don’t they
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This note was uploaded on 09/17/2009 for the course ECON ECON 2 taught by Professor Hamilton during the Spring '09 term at UCSD.

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L12 More Externalities - Chapter 11: Externalities and...

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