As an illustration of the apple-bee externality, suppose that a beekeeper is located next to a 20-acre apple orchard. Each hive of bees is capable of pollinating¼ acre of apple trees, thereby raising the value of apple output by $25.
a. Suppose the market value of the honey from one hive is $50 and that the beekeeper's marginal costs are given by
MC = 30 + .5Q
Where Q is the number of hives employed. In the absence of any bargaining, how many hives will the beekeeper have and what portion of the apple orchard will be pollinated?
b. What is the maximum amount per hive the orchard owner would pay as a subsidy to the beekeeper to prompt him or her to install extra hives? Will the owner have to pay this much to prompt the beekeeper to use enough hives to pollinate the entire orchard?