Farmers who grow apple trees provide a benefit to the beekeepers in Australia. The beekeepers get a good source of nectar to help make more honey. Suppose that the external benefit created by growing apple trees is $0.20 per apple. The perfectly competitive equilibrium price of an apple is $1.

(a)On an appropriate diagram, label the equilibrium quantity in the Australian apple market as Q_market. Also show the quantity of apple that would maximise social surplus from the apple market as Q_optimum. Does Q_market equal to the perfectly competitive equilibrium quantity? Fully explain your answer and label the area of deadweight loss (if any).

(4 marks)

(b)An economics student in ECW1101 class suggests an alternative policy. She says that if the government sets a price floor of $1.20 per apple then this will maximise social surplus. Is she correct? If she is correct, show the social gain under the student's policy compared to the perfectly competitive equilibrium. If the student is incorrect, show the deadweight loss under her policy. (4 marks)