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.

The Halo Effect

Microsoft’s latest game release in the multi-billion dollar Halo franchise is set to release this September 14. Why is Halo such a popular series, with its many spin-offs, book and merchandise? The halo effect. While the name might be a bit ironic, the idea is simple. Described in depth in this Businessweek article, the halo effect has turned a one-time game into a gaming and internet icon. The original Halo release was as part of the debut for Microsoft’s X-box in, a revolution in console gaming. That was 2001. Skip ahead to 2010; the Halo franchise is looking at it’s 6th title release, and expecting record-setting results.

So what does the halo effect have to do with Halo’s popularity? The halo effect is described as a simple bias. The perception of one trait is affected by that of another. In other words, if the part of the series looks good, so does the rest. After Halo set major sale records in 2001, the plan for the sequel’s release was set for 2004. But what made Halo 2 sell so well? Halo 2 sold well because people saw and understood how good the original Halo was, and therefore decided (with bias) that the second one should be as well. That is, the perception of an aspect in the series’ first game affected that of the second, and then the second with the third and so on. This growing effect lead to the expansive growth of the series, with it’s release of Halo 3 in 2007 netting over $600 million. The franchise itself has an estimated revenue of $16 billion after June of 2010. And finally, this bias towards the solidity and other overshadowing aspects of the Halo franchise culminates as Microsoft is prepared to back it’s latest release with “the largest marketing budget it has spent on a game.” While Microsoft won’t disclose just how much it’s planning on spending on the new release, it can be estimated that sales will cover this cost and much, much more for the gaming and software giant.

The halo effect can also be applied to more vague aspects of economics. Take Halo for example. It’s simply a game franchise building on it’s previous releases, the same way shoe companies release new model cleats each year or car companies with newer, safer cars. You wouldn’t feel impulsive when buying a cleat or a car you knew nothing about. But based upon the cleats looks (say it’s shiny, with a large, vibrant logo on the side), you may feel the cleat as being superior to others. Price can also create bias. The general idea is that things that cost more are better. While this may be true in most situations, it is not always the case. If you can’t decide between two cars with exactly the same paint, frame, ratings and reviews, price might influence which one you think is superior, when in fact they are both equal.

Opportunity Cost

“Time is money” -Benjamin Franklin

A simple statement that helps define the concept of opportunity cost. Opportunity cost is not just the cost of the item or activity you are attending, but the cost of the activities, items and time you are giving up in order to obtain your want. Opportunity cost may at first seem to be only the cost of your activity (say $100 to see a baseball game), but it is really much more. To find the true opportunity cost of an activity, you need to account for the things you are giving up as  well. For example, in the 5 hours you are spending watching the baseball game, you could be doing other things, such as spending time with your family, or reading a book, or cleaning you house. These things can be priced upon personal value, meaning they can be compared against the value of the baseball ticket. So the actual price of going to the baseball game is not only the price of the ticket, but the personal cost of whatever activity you are choosing to give up as well. These things are known as alternatives.

You can sum together all of you alternatives into a single price to understand the real opportunity cost of your chosen activity, right? Wrong. You can’t sum these values together because you don’t have enough time to do them all. You only have time for one alternative. Let’s say for example that instead of going to the baseball game you could instead spend time with your family for 5 hours or work on a book you are reading for 5 hours. Now, the opportunity cost is not both of those activities because even if you did not attend the baseball game, you cannot spend time with your family and read your book because the sum of time is 10 hours, and you only have 5 available hours from not attending the baseball game. For this reason, you cannot sum together the value of all your alternatives as being part of an activities opportunity cost.