A competitive beekeeper sells honey at $5 per pound. In the course of producing a pound of honey, the bees pollinate apple trees in neighboring orchards, thereby saving the orchard owners $1 worth of effort.

a. Draw a graph showing the beekeeper's social and marginal cost curves. (Remember that this is one competitive firm, not an entire industry!) What quantity does the beekeeper produce? Illustrate his producer's surplus, the gain to the orchard owners, and the total social gain.

b. What policy could lead to a higher social gain? If the new policy is implemented, illustrate the gains and losses to all relevant groups.

c. In the absence of transactions costs, in what sense does it not matter whether your policy is implemented, and why?