Imagine a beekeeper, who produces honey and sells it at a constant price per kilogram.

Draw a diagram with the quantity of honey on the horizontal axis, showing the marginal cost of honey production as an upward-sloping line, and the price of honey as a horizontal line. Show the amount of honey that the profit-maximizing beekeeper will produce.

For the beekeeper, the marginal private benefit marginal private benefit (MPB) The benefit (in terms of profit, or utility) of producing or consuming an additional unit of a good for the individual who decides to produce or consume it, not taking into account any benefit received by others.

marginal private benefit (MPB) The benefit (in terms of profit, or utility) of producing or consuming an additional unit of a good for the individual who decides to produce or consume it, not taking into account any benefit received by others.

of producing a kilo of honey is equal to the price. But since the bees benefit a neighbouring farmer, by helping to pollinate her crops, honey production has a positive external effect. Draw a line on your diagram to represent the marginal social benefit of honey production. Show the quantity of honey that would be Pareto efficient. How does it compare with the quantity chosen by the beekeeper?

Explain how the farmer and beekeeper could both be made better off through bargaining.