# external benefit confusion

I'm a little confused by the following question and answer provided by MRU:

Fruit farmers pay beekeepers for their honeybees’ pollination services. Honeybees provide an external benefit to fruit farmers. However, fruits provide an external benefit to the beekeepers because their honeybees need fruits. Which external benefit is larger: honeybees’ external benefit to fruit farmers and fruits’ external benefit to beekeepers?

Honeybees’ external benefit to fruit farmers is larger

This seems like the least fitting answer to me. The fruit farmers pay the beekeepers for their services, so the benefits they get from this relationship are mostly accounted for by the cost. However, beekeepers don't have to pay the farmers for the benefit their bees get from pollinating their plants, so this benefit is an external benefit that farmers give to beekeepers. Am I misunderstanding something here?

Not sure I understand your confusion.

Fruits provide external benefits worth $$X$$ to honeybees, honeybees provide external benefits worth $$Y$$ to fruits.

Knowing all this, farmers and beekeepers agreed that farmers should pay beekeepers amount $$Z$$, which probably comes close to making things even, meaning $$X + Z = Y - Z$$. Since $$Z > 0$$, $$X < Y$$.

• I think the $Z$ making things even should be given by $X+Z=Y-Z$. – VARulle Apr 23 at 16:42
• @VARulle You are right, I will edit the answer. – Giskard Apr 23 at 17:28
• But actually I believe there is not enough information to answer the question. One of the two sides could have much more bargaining power than the other, for whatever reason. Then who pays how much is only constrained by individual rationality and $X\ge Y$ cannot be ruled out. – VARulle Apr 23 at 18:03
• @VARulle Sure, but then why do you assume rationality? That is also not explicitely stated. I agree that my interpretation is not the only one, but I think it is probably the one they were thinking of. You are of course free to write a better answer that encompasses more cases :) – Giskard Apr 23 at 20:31
• I'm sure this is what they were thinking of. But is it also the right answer? Rationality is a (tacit) standard assumption, but which assumption gives you equal surplus division? (I shouldn't have used the term "bargaining power" in my last comment, since it's not even a bilateral bargaining setting. This also rules out Nash- or KS-bargaining solutions.) – VARulle Apr 24 at 22:09

If an orchard and a beehive are situated close together, the bees pollinate the plants and the plants provide food for the bees. For the beekeeper this food is an unpaid factor in honey production and therefore a positive externality. For the fruit farmer the pollination is an unpaid factor in fruit production and therefore a positive externality.

Orchards are immobile, while beehives are mobile. The beekeeper has the property right on his beehive, so the fruit farmer cannot just take a beehive and put it into his orchard. The fruit farmer has the property right on his orchard, so the beekeeper cannot trespass the orchard. But this is not necessary for feeding the bees. Foraging bees roam about 2 miles, so it's enough if the beekeeper places his beehive sufficiently close to some orchard for the bees to be fed. This cannot be prohibited by fruit farmers.

As a result, fruit farmers who happen not to have enough bees around their orchard will compete for pollination services of beekeepers. Depending on the details of the market structure, some non-negative market price will be established on the market for pollination services. This holds independently of the exact size of the externalities, so the question cannot be answered.

(However, this is obviously not the answer MRU had in mind. What they had in mind is most likely the answer provided by @Giskard.)