How much wealth could potentially be created in this world

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Reference no: EM133331336

Case Study: Let's head out to the Coasean orchards where we have some beekeepers raising honeybees near an apple orchard. The bees definitely like to visit the apple trees, but suppose they are unnecessary for apple pollination. Also suppose that bees have plenty of other non-apple trees to get nectar and pollen from.Suppose we know:

Benefit of beekeeper harvesting honey is $40, Benefit of orchard farmer harvesting his "super-duper" apples successfully is $60, Orchard farmer can also choose to grow "kinda-super-duper" apples, but they only generate $18 for him.,Negotiation costs $100,000 (do not incur this cost if damages are paid)

The beekeeper's bees will always visit the apple orchard. If the farmer grows super-duper apples, for some reason the bees all die. If the farmer grows kinda-super-duper apples, the bees live (with neither cost nor benefit to either the farmer or the beekeeper).

Question 1) How much wealth could potentially be created in this world?

Question 2) What is the size of the "optimal" Pigouvian tax recommended by the traditional (pre-Coasean) theory? Why?

Question 3) Would this tax solve the social cost problem? Comment briefly.

Question 4) Suppose the transactions costs were zero and the authorities rather than imposing the tax on the apple orchards of $40 instead assigned legal liability to the apple orchard for the dead bee damage. In this case, what would the likely outcome be? Would it be efficient? Explain why or why not.

Question 5) Suppose the transactions costs were zero and the authorities decided that, rather than imposing legal liability on the apple orchards, that a Pigouvian tax of $40 made sense instead. In this case, what would the likely outcome be? Would it be efficient? Explain why or why not.

Reference no: EM133331336

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