Data Response – Burkina Faso

Question 1: Explain what is meant by a negative externality.

A negative externality is an effect of production or consumption on a market that has an unseen social cost, as it retracts from society. The result of negative externalities is a market failure, as it causes goods to be overconsumed (in the case of production externalities) or overproduced (in the case of consumption externalities). The result of this overconsumption or overproduction is welfare loss, which can be physically measured using a supply and demand diagram.

Question 2:  Using supply and demand diagrams, explain how negative externalities result in market failure.

To understand how negative externalities cause market failure, we first must address that there are two types of negative externalities: that of supply and that of demand. A negative externality of supply is, taking an example from the article, when forest land exploited for farming destroys other wildlife which could have provided in the economy. This can be demonstrated in Figure A below. Here, the marginal private cost (or MPC), is lower than the marginal social cost (MSC). This means that is cheaper for the firm to produce than the actual cost to society, which can result, again in the example of deforestation, in severe environmental degradation. The marginal benefit in the diagram represents the demand for the firms production. With this we can see that since the firm is producing under the cost to society, quantity increases from Qs to Qp and price drops from Ps to Pp. The result is a market failure, as the firm is overproducing and the produced goods are being consumed in a way that degrades other potential in the economy, hence the greater social cost.

Question 3:  Explain why an increase in the level of poverty within Burkina Faso contributes to environmental degradation.

An increase in the level of poverty in Burkina Faso leads to environmental degradation as there is less concern for sustainability when those involved in the production process view their production as a means of survival instead of market operation. That is, there is a certain level of severity involved when those producing are destitute, as losing sales may result in losing what little they possess. Because of this producers may feel inclined to try and produce more than can be sustained by the environment in order to secure their living. The results is environmental degradation as crop lands are not turned over properly and soil become infertile, making it useless to both human cropping and natural rehabilitation. When this happens the poverty-stricken farmers look to produce new crop land by then deforesting areas to be used in the same, unsustainable manner.

Question 4:  Discuss strategies that the government of Burkina Faso could introduce to reduce the extent of forest degradation.

The number one way for the government of Burkina Faso to reduce forest degradation is to subsidize and promote sustainable farming. Forest degradation occurs as land previously used by farmers becomes infertile due to poor agricultural practice in order to try and produce a larger crop yield than the land is capable of. The reason this is done is because practicing sustainable farming involves both a monetary commitment and time lag that makes sustainable practice more expensive and less practical than producing for a maximum yield. However, if the government of Burkina Faso was to try and subsidize substantial factors required for sustainable farming forest degradation could be averted. This involves addressing the two major factors involved with moving towards sustainable practice. The first of these is the monetary commitment, which involves reorganizing existing farms and providing them with the equipment needed to practice sustainable farming. This can come as a direct subsidization by the government through tax cuts or equipment production subsidization. The second factor that must be addressed is the time lag. The restructuring of the farming market will involve a period when crop yield will drop due to the restructuring. The government will have to look to subsidize crop supply in the market to ensure there is plenty of harvest available for consumption to avoid inflation as the supply from the restructuring farms contracts. This could be done by temporarily increasing crop imports into Burkina Faso to take the place of local produce temporarily or could be done by delaying the restructuring until sufficient crop reserves grown in Burkina Faso could be made and then released during the restructuring period.

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Economic Indicators

In economics, certain indicators can predict economic shifts and changes in AS and AD. These indicators, known as economic indicators, can be grouped into two categories:

Leading indicators are indicators in the economy that can be used to predict economic activity before it occurs. These indicators are important to economists as it allows them to use information from the economy to predict and manipulate aspects of the economy in order to prevent market failure. Certain leading indicators include stock changes, changes in debt and money supply in an economy.

Lagging indicators are indicators in the economy that follow economic activity. While these indicators cannot be used to predict economic activity, it can be used to reflect upon the effect on economic changes. This is important as it allows economists to see the effects of economic changes in order to predict how to prevent these effects in the future. Lagging indicators can include changes in interest rates, changes in consumer price index (CPI) and unemployment.

Investment Surges in Renewable Energy

Trends in 2010 have lead to an increase in investment for renewable energy by around 34%. An investment in renewable energy by a government would affect the economy’s aggregate supply (AS). This is because with renewable energy, there will be a decrease in production costs, a factor of the AS curve. By saving costs in the production phase by reusing resources, forms will have more capital to spend of increasing production and expanding. This will lead to a shift to the right for the AS curve as the total production possibility of the economy increases. This shift will lead to a drop in average prices and an increase in Real GDP as the economy produces more. This decrease in average prices can be seen in Figure 1 as the shift from P to P1. Additionally, the increase in Real GDP can be seen as a shift right from Y to Y1. This will most likely lead to an expansion in economic capacity in the long run as there is less spending on long term production costs, leading to an increase in production and therefore in a rise in Real GDP in the economy.

 

Oil Prices to Cause Supply Shift in the Airline Industry

Prices of crude oil dropped Tuesday, increasing Airline stock and causing a drop in oil supply to major airlines. This is one of the first significant oil price drops for the airline industry since the market crashed in 2008 and 2009. With oil reaching a benchmark of $73.07 a barrel Tuesday, many oil suppliers chose to withhold sales, causing a spike down in the market supply of oil along with the price drop. With this spike downward in supply and upward in demand, oil prices can be expected to bounce back up to at least $75 a barrel by October. This decrease of oil supply in the market can be represented along a Supply Curve Diagram.

As can be seen in the Supply Curve Diagram, a shift in the price of oil has caused a decrease in the quantity of oil supplied to the market. The supply curve in the diagram represents how much oil producers are willing to supply to the market at its relative price. P1 represents the price of the oil before the price dropped. Q1 represents how much oil producers were supplying to the market at that price, also before the price drop. P2 and the movement of the arrow from P1 to P2 represents the price drop for oil in the market that took place Tuesday. Responding to this price drop, producers withheld sales of oil, causing a downward shift in supply. This shift is reflected by the shift from Q1 to Q2 along the supply curve, and represented by the arrow moving leftward along the supply axis.