Question

4. All the residents of Hazzard County love to make fresh apple pies. They all love apple pies so much that they all have their own apple trees. Up the road a piece, Uncle Jesse and Daisy keep bees for producing honey (it's really just a front business through which they funnel all of Bo and Luke's black market moonshine profits). Assume the Hazzard County honey market is perfectly competitive. The local bees buzz around all over the Hazzard County and pollinate all the apple trees, providing a crucial service to county residents. Assume that without the bees, no one's trees would get pollinated and no one would be able to grow apples and make fresh apple pies. a. Using a simple supply and demand diagram of the Hazzard County honey market, model the positive externality associated with honey production. Be sure to show both the competitive equilibrium and the socially optimal equilibrium honey output and price. b. Using your diagram, show the total economic welfare that would be obtained if the market produced the competitively optimal amount of honey versus the socially optimal amount of honey. What is the increase in social welfare that would result from moving from the competitive equilibrium to the socially optimal equilibrium? c. How might Boss Hogg's economic advisor construct a basic market intervention policy that would induce the local beekeepers to produce the socially optimal amount of honey? Mathematically demonstrate your answer.

Answer 1

Externality is the effect of one person's action on other people (and the surrounding environment). Negative externality relates to negative effects whereas positive externality refers to positive benefit. Government can internalise the negative externalities by imposing tax and the positive externalities by granting subsidies.

Externality is the effect of one person's action on other people (and the surrounding environment). Negative externality relates to negative effects whereas positive externality refers to positive benefit. Government can internalise the negative externalities by imposing tax and the positive externalities by granting subsidies. a) Hazzard county honey market is perfectly competitive. Here, production of honey (by virtue of bee keeping) has a positive externally on the graph of apple trees and hence on the people of Hazzard country .In the presence of this positive externally the social value of honey exceeds the private value. In the following diagram we have considered the honey market In the above diagram ss' is the supply curve which is associated with the private cost DD' is the demand were representing the private value where D_1 D_1 is the social value as well as the external benefit p_1 and Q_1 are the competitive equilibrium price and quantity respectively Again p^* and Q^* are the socially optimal