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Chapter 11, Problem 2PA

Subpart (a):

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Subpart (b):

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a. According to Economist Vilfredo Pareto, a condition of ‘Pareto Optimality’, which refers to efficient allocation of natural resources such that no reallocation of resources of such could benefit any person without lowering the net benefits for at least one other person, cannot be attained in the presence of Externalities. Explain how externalities affect the condition of Pareto Optimality using suitable examples of each type of the externalities.

Explain the concept of an externality. Explain and show graphically how externalities lead to market failure and an inefficient allocation of resources.

To produce honey, beekeepers place hives of bees in the fields of farmers. As bees gather nectar, they pollinate the crops in the fields, increasing the yields of these fields at no additional cost to the farmer. a) Is this an externality in consumption or production? b) Is this a negative or positive externality? c) If this externality is not internalized, would beekeepers produce more or less bees than socially optimal? Why? d) Suggest a market-based solution that would internalize the externality. In your answer, give reference to the social cost and social value curves. e) What might be a reasonable private solution to this externality and how might the solution be reached?