Wednesday, 7 September 2016

Uber for bees and trees

One of the key examples we use to illustrate potential bargaining solutions to externalities involves bees and apples. The original example dates all the way back to a 1952 article in The Economic Journal by W.E. Meade (ungated here), who wrote:
Suppose that in a given region there is a certain amount of apple-growing and a certain amount of bee-keeping and that the bees feed on the apple-blossom. If the apple-farmers apply 10% more labour, land and capital to apple-farming they will increase the output of apples by 10%; but they will also provide more food for the bees. On the other hand, the bee-keepers will not increase the output of honey by 10% by increasing the amount of land, labour and capital applied to bee-keeping by 10% unless at the same time the apple-farmers also increase their output and so the food of the bees by 10%.
What Meade was describing was two positive externalities. Remember that an externality is the uncompensated impact of the actions of one party on a bystander. In the first case, the apple-farmers generate a positive externality for the bee-keepers (if the apple-farmers grow more apples, they provide an additional benefit for the bee-keepers in the form of more food for the bees and consequently, greater output of honey). In the second case, the bee-keepers generate a positive externality for the apple-farmers (if the bee-keepers keep more bees, then the apple trees will produce more fruit, increasing the profits of the apple-farmers). Now the problem here is that, because the apple-farmers are only concerned about their own profits, they don't take into account the benefit their trees provide for the bee-keepers, so they will plant too few trees. And similarly, because the bee-keepers are only concerned about their own profits, they don't take into account the benefit their bees provide for the apple-farmers, so they will keep too few bees.

One potential solutions to this positive externality problem that we discuss in class is the possibility of integration (the apple-farmers start to keep their own bees, or the bee-keepers start their own apple orchards, or the two come together to form a joint venture business that produces both apples and honey - mmmm, honey-glazed apples). Another potential solution is contracting - the bee-keepers and the apple-farmers get together and agree to a contract, that specifies the number of trees that will be grown, the number of bees that will be kept, and perhaps some side-payment from one party to the other.

In 1973, Stephen Cheung wrote a follow up to the Meade paper in the Journal of Law and Economics (ungated here), where he pointed out that contracting solutions to the bees-and-trees problem were not observed in the real world, because the transaction costs of these agreements are too high (transaction costs in this case are the costs of negotiating a suitable agreement between the apple-farmer and the bee-keeper - if the costs are high, it will be more difficult for the parties to justify the expense of coming to an agreement). Instead, a social norm developed between apple-farmers and bee-keepers in terms of the number of bees per orchard, etc. Of course, a social norm is just an informal contract by another name.

But, thinking about those high transaction costs that prevent bee-keepers and apple-farmers from easily contracting brings me to this article from the New Zealand Herald about the software-based beekeeping service BeezThingz:
BeezThingz provides a match-making service to beekeepers and land owners.
We provide our beekeepers with hive management software for inspection logging and customer management. Our land owners get all the benefits of having a beehive with none of the hassle...
How it works is people express interest through our website and then I forward that on to the appropriate beekeeper who looks after their area. The beekeeper will go out and do a site inspection, walk around the property and talk through all the potential hazards with the landowner. They will then book in a delivery date, install the bees and get a regular service schedule.
Yes, it is like Uber for bees and trees, or given that they describe it as a match-making service, maybe it is like Tinder for bees and trees? In any case, the business model is all about reducing the transaction costs of negotiating a contract between land owners and bee-keepers, since there are standard contract terms (a more formal version of the solution that Cheung noted). And when transaction costs are low, the Coase Theorem says that private parties can often solve externality problems on their own (i.e. without government intervention). Meaning in this case, the right number of bees for the right number of trees, and everyone wins.

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