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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Data Response – Nigeria

Question 1:  Explain using supply and demand diagrams why in the last two decades of the 20th century the long term price of commodities such as oil fell.

One explanation for the drop in oil prices in the last two decades of the 20th century is an increase in its supply, or availability. This increase in supply coincides with times of increased drilling for crude oil in the world, specifically in countries such as Saudi Arabia and the United Arab Emirates, making it a valid explanation for the drop in long term commodity prices. This increase in supply be demonstrated on a supply and demand graph, as seen in Figure A. Here the supply of oil increases from S1 to S2, causing a decrease in price. The price here drops across the two decades from USD 37 to USD 17, as shown in Figure A. A subsequent effect of the drop in oil prices is the increase in demand and therefore Real GDP, which is shown as Q1 increases to Q2 in Figure A.

 

Question 2:  Explain how falling commodity prices can impede economic development.

With an increase in global oil supply and a drop in oil prices, oil producers receive less revenue for a static quantity of oil. This means that oil producing countries, such as Nigeria, face reduced revenue as additional producers, such as UAE encroach on market shares. This means that the total GDP for the country decreases as there are less injections from oil exports into the economy. With less liquid currency moving within the Nigerian economy economic development is restricted. This is because economic development depends on the transfer of capital in the economy. As capital moves within the economy it is available for development and expansion of markets within the economy, which in turns provides consumers and producers with more availability. This is a form of economic development, as the economy expands, while it does not necessarily raise the standard of living for everyone in the economy.

 

Question 3:  Using the data above, comment on the economic development process in Nigeria over the period 1997 to 2009.

Economic development took place over the last decade in Nigeria as the price of oil rose. The result of this is an increase in the revenue for Nigeria and therefore the available capital in the economy. With capital available in the economy for spending and purchasing goods both consumers and producers are stimulated, resulting in increases in investment and overall purchases. This inflow of capital can be seen in the data as Nigeria is constantly positive in its current account balance (with the exception of 2001), which means that it is annually exporting more than it is importing, result in an increase in capital for the economy. The result, as shown by the data is an increase in the spending on healthcare in Nigeria, as infant mortality has dropped significantly from 2001 to 2009. Additionally the Nigerian economy has developed in reducing its outstanding debt from 1997 to 2009, which indicates again that the Nigerian economy is looking to secure future development.

 

Question 4:  Examine the factors that might have caused the fall in the economic potential of a country as rich as Nigeria.

Factors that could have potentially caused a drop in the economic potential for a country as rich as Nigeria include, most namely, a drop in potential revenue that fuels the country’s development. As it can be seen in the data above, the drop in oil prices resulted in a drop in revenue for the Nigerian economy, and with less liquid capital in the economy it becomes harder for consumers and producers to expand and develop. This drop of revenue, while a singular factor effecting the economy, can stem from a number of sources. Most likely given the historical context of Nigeria, an increase in supply of oil from other producers has driven down the global price of oil, reducing Nigerian revenue. A drop in the supply of Nigerian oil could be a cause of revenue loss as well, as there is less inflow to the Nigerian economy. Finally, a drop in consumer demand for Nigeria’s exports, both oil based and otherwise, could be a cause for a fall in economic potential for Nigeria. While this is unlikely given the global growing demand for oil since the 1950’s, it is a possible factor to take into consideration.

 

Question 5:  From the early 2000s the price of oil has risen again. Using appropriate diagrams, evaluate the impact of an oil price increase on the economy of Nigeria.

As the price of oil has risen the impact in Nigeria has been an increase in revenue from oil exports. This is apparent in the data given the  drop in outstanding debt (which could only come from revenue in Nigeria being used to pay back the debt), the consistent current account surplus experienced by the Nigerian economy (with the exception of 2001), and the consistent GDP growth in excess of 3% since 2000. This can be attributed to the increase in oil prices globally as the demand for oil increases. This can be represented on a supply and demand diagram, such as in Figure B. Here, demand increases from D1 to D2, which subsequently leads to a rise in price, specifically from 17 USD in 1995 to 104 USD in 2011. The result is a further increase in the Real GDP of Nigeria from Q1 to Q2.

Section 3.3 and 3.4 Summative Reflection and Wiki

I recently scored a 9/10 on my summative assessment for sections 3.3 and 3.4. I feel this score is appropriate given that I gave real world examples when looking at specific changes in the AS/AD model, which I failed to do in the formative assessment. However, I didn’t reach a 10 as I missed a key definition in the beginning of the question.

Additionally, my economics class has recently started work on a Wiki for the section 3.5 definitions and diagrams. In the wiki we decided that we could cover the definitions while trying to link them to real world examples via articles on the web. In order to do that I was assigned the task of finding articles relevant to certain terms, such as real wage unemployment. This article talks about how real wage unemployment is still stagnant even though there has been a large scale recession in overall unemployment in recent months. Real wage unemployment is a form of unemployment caused by the raising of wages beyond the market capacity, driving the number of those applying for jobs above the number of available positions. This leaves a portion of those applying without available jobs, and therefore unemployed.

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.

 

Pricey Raw Materials Causes a Rise in Beer Production Costs

The price of beer production is set to increase as the price of raw materials for beer production increases as well. Using our understanding of Economics and Cost vs Output, we can represent this shift. In Figure 1, TVC represents the Total Variable Cost, which is graphed as price over output.. The raw materials costs for the production of beer are variable costs, as they can change based on the market. Variable costs are subjected to the three major laws of cost output: Increasing Return, Constant Return and Diminishing Return. Increasing Return states that as the initial units of variable cost (those directly proceeding the costs origin) produce a large return for a small increase in cost. In Figure 1, this is represented by the steep curve projecting from the graphs origin. Following this, Constant Return shows an equal increase in output for every unit of variable cost added. This is represented by the linear section of the graph following the area of Increasing Return. Finally, the law of Diminishing Return states that at a certain point, for every unit of variable cost added, the output is less. On Figure 1 this is represented by the rising curve toward the right of the TVC curve.

In Figure 1, the rise in the price of raw materials for beer is represented with the shift from TVC to TVC1. From this shift, we see that the initial variable cost remains at 0, as both TVC curves cut the axis’ at 0. However, due to the increase in price of raw materials, the TVC1 curve rises above the initial TVC curve representing higher prices for equal output between the two lines.

Reflection – Price Ceilings and Price Control

1) I found the Problem Based Learning (PBL) was very effective in reinforcing the ideas presented in lesson 2.1. While it allowed us to apply our knowledge to real-world type situations, we were also limited in the way we were allowed to express our understanding. We can apply all of the economic terms we understand to solving the problem, but in presenting our findings to a rather uneducated audience we were left with a more or less ‘dumbed-down’ version of our final conclusion and opinion. The inclusion of an Op-Ed piece was also very useful, as we were required to persuade an audience now instead of simply informing, something that real economists must be able to do effectively if they are to convey an idea to large audiences. While this let us practice restricting our vocabulary and conveying our ideas through simpler means, it also meant cutting out a large part of our findings and explanation behind our thinking, which I found to be a very core and integral part of the project.

2) The most important thing we’ve learned so far in this lesson is about how price control can create shortages or surpluses. This is crucial in understanding both why price controls restrict free market equilibrium and can impact the efficiency of the market. Without price controls, the market can operate at a price that guarantees a maximum surplus for both producers and consumers, making the population of both groups much happier. In times of shortages or inflation however, price control could in fact help the economy by limiting the amount of a resource consumed over a certain period of time, or allowing everyone to be able to afford that resource to survive.

Why Price Ceilings Create Shortages

In this post I’ll be describing how prices ceilings create shortages in an economy. First off, a price ceiling is the maximum highest price a resource can sell for in an economy. This means that the product cannot be sold, or bought for higher than this price. It is common to see price ceilings on very scarce resources to keep their prices from rising as demand increases. A good example is gas. The price of gasoline in the United States has risen to extreme values in the last ten years. Imposing a price ceiling on gasoline would ensure that price is kept affordable for everyone, however, it also creates shortages as the supply for gasoline and the demand for gasoline are not equal. This can be shown in a supply and demand curve diagram.

Logic would dictate that the price for gasoline in this economy would be equal to the point at E1, where both supply and demand are equal. At this point producers are supplying the gasoline they want to at a price they can justify, and consumers are demanding that exact mount of gasoline for the same price that producers are selling it for. This point, located at E1, is known as equilibrium, or the point at which both the supply and demand curve are satisfied. If a price ceiling is imposed though, the maximum price a product can sell for is shifted down to Pc. At this point, the amount supplied along the supply curve is only S1, and the amount demanded is D1. As we can see from tracing the points down to the quantity axis, supply is much less than demand now, given that the gasoline’s selling price is restricted by the price ceiling. If supply is less than demand, that the gasoline will face a shortage, since both supply and demand fall below the point of equilibrium. With demand now overpowering the supply, not everyone will receive gasoline. This shortage is represented on the diagram as the line below the point of equilibrium.

A black market is a market that sells goods or resources without the restrictions placed on them by regular pricing; in this case a price ceiling. A black market would alleviate the shortages created by imposing the price ceiling by allowing people who desperately need gas, but are supplied none due to shortages, to buy the resource for a price not regulated by the price ceiling. This price would most likely be very high, much higher than the gas produced under the price ceiling, but it would also create a supply for a resource to a population that would not be able to afford the gas at all due to shortages, helping alleviate shortages.