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.

International Economics (Section 4) Review

  • Free trade is international trade free from any restrictions like tariffs, quotas or other protections.
  • Exchange rateis the price of one currency in terms of another currency.
    • Fixed – the value of the currency against other currencies remains the same. It’s maintained by gv by intervening in the foreign exchange market using foreign exchange reserves to buy and sell the currency.
    • Floating – the exchange rate is determined by demand and supply in the foreign exchange market only.
    • Managed – Currencies are allowed to fluctuate in a narrow band in the short run, and allowed to be realigned in the long run.
  • Currency movements
    • In floating– appreciation and depreciation
    • In fixed– revaluation and devaluation
  • Balance of payments– a record of all flows of money in and out of a country, current + capital account.
    • Must equal zero.
  • Balance of trade – the difference between the value of exports and imports.
    • trade surplus – greater value of goods and services exported than imported
    • trade deficit – greater value of goods and services imported than exported
  • Capital account – movement of funds and loans for investment to abroad: sales of assets to foreigners and purchases of assets located abroad.
  • Current account – the exports and imports of goods and services between countries and overseas, and net transfers: transfers of money.
    • Deficit – when there are more imports than exports
    • Surplus – when there are more exports than imports
  • Absolute Advantage – The ability to produce a particular good with fewer resources than another country
  • Comparative Advantage – The ability to produce a particular good at a lower opportunity cost than another country
  • Visible Trade
    • Imports and exports of goods (surplus or deficit)
  • Invisible Trade
    • Imports and exports of Services (surplus or deficit)
      • Tourism, Service
  • Foreign exchange market – Where currencies are bought and sold.
  • Protectionism– an economic policy of restraining trade- saves the domestic industries
    • tariffs (taxes on imported goods), quotas (limit on quantity of goods that can be imported), and government regulations
  • Bonds: An IOU from the government
    • Government says it will owe you an x amount of money
      • Bond yields carry interest, and at the end you get how much you bought it for + yield. Yield depends on the demand. Yield is generally greater on longer term bonds.
J-Curve Diagram: With time, an economy’s exchange rate against a foreign currency depreciates and appreciates. Cash outflows suggest, an economy depreciating it’s currency and having other currencies buy their products, as a result, the economy who is depreciating reaches a point in which they begin to appreciate again because they are selling more than they are buying, a thus a upward shift in the curve. This is all under the assumption and applicable only under the Marshal-Learner conditions that state each economy are trading inelastic goods, which are goods that are not sensitive to price change.

Theory of the Firm Review and Definitions

Here is my final review for the Theory of the Firm. Over the last week I have worked in putting together this powerpoint in order to help myself review the definitions and terms. However, upon completion I figured it would also serve as a good tool for helping others study. Feel free to use it and share it on your own blog, as I would really appreciate the reference.

Concepts of the ‘Law of the Firm’ and Tennis Balls

Friday in class we practiced an activity in which our class practiced the some of the concepts of the Law of the Firm. In the game we had two buckets, and a variable amount of workers responsible for moving the balls from one bucket to another. For every ball moved, one product was produced. This process would be repeated with increasing amounts of variable factors, in this case workers. This activity allowed us to form a table consisting of many Law of the Firm concepts. Three of these concepts are the law of increasing return, the law of constant return and the law of diminishing return. The law of increasing return states that for the first few factors of variable cost (workers in our activity) added, the increase in output will be greater than the increase in cost. The law of constant return states that for the following factors of  variable cost added, the increase in output will be equal to the increase in cost. The law of diminishing return states that for the final factors of variable cost added, the increase in output will be less than the increase in cost. According to these concepts, we can set a price for our products, and determine how many workers we should use to produce a set amount of product in order to maximise our revenue to cost ratio, similar to real business.