Suppose that a bee farmer (to make honey) is located next to an apple orchard. According to Ronald Coase, since the bees pollinate the apple flowers, the apple farmer should pay the bee farmer to internalize the externality.

Question

Quizplus · Accepted Answer

Ronald Coase's Coase Theorem argues that when there are externalities between two parties, the efficient outcome (where social welfare is maximized) can be achieved regardless of who has the property rights, as long as transaction costs are low. In this case, if the bee farmer has the property rights to the bees, they could charge the apple farmer for the positive externality of pollination. If the apple farmer has the property rights to the apple orchard and therefore the flowers, they could pay the bee farmer to bring their bees to pollinate the flowers. Either way, the transaction would result in an efficient allocation of resources.

Suppose That a Bee Farmer (To Make Honey) Is Located