The diagram below shows the supply and demand diagrams for the competitive market for honey in one region. MC0 represents private marginal cost and MB0 represents private marginal benefit. FIGURE 16- 3
-Refer to Figure 16- 3. Assume there are two types of firms in this region - beekeepers that produce honey and orchard keepers that produce peaches . The bees provide a benefit to the orchard keepers by pollinating their peach trees. In the absence of any government intervention, the equilibrium price and quantity in the honey market are

Question

The diagram below shows the supply and demand diagrams for the competitive market for honey in one region. MC0 represents private marginal cost and MB0 represents private marginal benefit.  FIGURE 16- 3
-Refer to Figure 16- 3. Assume there are two types of firms in this region - beekeepers that produce honey and orchard keepers that produce peaches . The bees provide a benefit to the orchard keepers by pollinating their peach trees. In the absence of any government intervention, the equilibrium price and quantity in the honey market are

Quizplus · Accepted Answer

In the absence of any government intervention, the equilibrium price and quantity in the honey market will be at the intersection of the supply and demand curves (MC0 and MB0 respectively) which is at a price of $7 and a quantity of 80 kg. This is because at any other price or quantity, either there will be excess supply or excess demand, which will cause the price to rise or fall to reach the equilibrium point.

Since there are two types of firms in the region - beekeepers and orchard keepers, and the bees provide a benefit to the orchard keepers by pollinating their peach trees, there is a positive externality associated with the consumption of honey. This means that the private marginal benefit (MB0) is lower than the social marginal benefit (MSB), which takes into account the positive externality. As a result, the equilibrium quantity is lower than the socially optimal quantity.

However, without any government intervention, the market will not reach the socially optimal quantity because the beekeepers and orchard keepers will only take into account their private costs and benefits and will not consider the positive externality. Hence, the best choice is to have government intervention in the form of a subsidy for beekeepers or a tax on orchard keepers to incentivize them to take the positive externality into account and increase the quantity of honey produced to the socially optimal level.

The Diagram Below Shows the Supply and Demand Diagrams for the Competitive