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.


Reflection – What I have learned about the “explain” question

In my most recent summative examination in IB HL Economics, I feel I have failed to effectively elaborate upon the question. In explaining the differences between profit maximization and sales revenue maximization, I missed the explanation between the two ideas as goals of a firm. An example of this is that while it may seem most sensible for a firm to maximize it’s profit, a goal aiming at long run production increase could choose to increase it’s sales revenue in order to lower cost, exploiting an economy of scale and marginal return increase. This is represented on a normal cost curve diagram as the cost of the product shifts downward along the AC curve. As well as this sales revenue maximization is a goal of the firm in increasing market shares, as lowering cost will result in the firm being able to gain more customer loyalty and temporarily boost sales. This idea as a goal of a firm is especially important in a monopolistic competition style market, where consumer loyalty and lowering prices is important in controlling market shares.

Production Possibility Curves and the Addition of Resources

Question: Using a production possibility curve, explain how the discovery of gold would effect an economy.
Response: The discovery of gold would expand the PPC of an economy. This is because gold would add an additional resource to the economy, expanding it’s production potential. On a PPC, this would result in an outward shift of the curve along both axes to a greater point. This can be seen below on the PPC diagram I have constructed to represent this shift. As you can see, the curve shifts from A1 to A2.

A PPC diagram depicting an outward shift of the maximum output curve

A1 represents the maximum output of the economy before the discovery of gold. A2 represents the maximum output of the economy after the discovery of gold. As you can see, the curve has shifted to a greater value along both axes from this discovery. This shows that the discovery of gold benefits the entire economy, as compared to a shift along only one axes, which represents a benefit to only a certain part of the economy.
A real life example of this PPC shift can be seen in Canada, where Bayfield Ventures Corp. has discovered a gold mineralization spot and has started drilling. This increase in gold in the economy increases Canada’s maximum production output, similar to what is represented in the graph above. This is because the addition of gold adds a new resource to the economy, expanding its maximum output.

Obama Seeks Tax Relief to Spur Growth – PPC

Earlier today President Obama expressed his wishes to expand tax relief in the U.S., proposing to start with increasing federal spending on the nation’s transportation system. Obama is encouraging these ideas in the hope that they will gain bipartisan support going into the November elections. It is uncertain whether or not the tax push will gain enough support to pass, but what is sure is that the proposition will have to be moved quickly if it is to take effect in enough time to change voter opinion this November.

Obama’s shift in spending from consumer to capitol based services can be shown on a Production Possibility Curve (PPC) diagram, seen below, and also explained here by me.

A PPC diagram explaining Obama's shift to Capitol services with his recent tax relief proposition.