ou may write your answers either directly on the problem set or on a blank sheet. Part I. Coase example An externality can be corrected via a tax, leading to the efficient allocation. Likewise, two parties could mutually agree to solve the externality even without the intervention of the government. This problem illustrates this using an adaptation of a famous example of externalities, with honey bees and an orchard. The idea is that the bees benefit from the orchard, and the orchard benefits from the bees, so there is a mutual externality. In our example, we will make the benefits flow in only one direction to simplify the algebra. Still, we are doing something different than lecture in the algebra because the externality from the bees will shift the cost function of the orchard. As a result, the external benefits from bees depend on the level of production of the orchard. Suppose that a beekeeper makes honey, which she sells in a competitive market with an equilibrium price P H = 20. The total cost of producing honey is T CH = H2 + 8H, where H denotes the quantity of honey produced. The beekeeper is located next to an