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.

How Can Fiscal Policies Be Used to Protect the Working Class?

In economics, many economists worry about the protection of the working middle class. This sector of the economy is generally understood to be very sensitive to economic adjustments. Any drastic changes in the aggregate demand or aggregate supply of an economy has been shown to have the most substantial impacts on the middle class. In addition, the middle class generally makes up the majority of the economy, meaning that if it is put under economic stresses, the entire economy suffers.

For this reason economists commonly devise fiscal policies to try and protect the middle class and it’s workers. A fiscal policy is a policy aimed at controlling the AD by increasing or decreasing government spending and taxation. The government can use these policies to protect the middle class by a number of means. By granting them tax deductions, the government is able to increase the real income of the middle class workers. By increasing spending on middle class benefits such as health and safety plans aimed at protecting the unemployed, the government is also able to protect the middle class.

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.


Increase in Demand by Trading Partners Leads to an Increase in Aggregate Demand in Singapore

According to this Topnews article, an increase in demand by Singapore’s trading partners has resulted in an in increase in Singapore’s aggregate demand. The aggregate demand of a country is the entire demand for all firms and companies in the economy.This increase in aggregate demand is due to the increase demand by Singapore’s trading partners, as Singapore is now required to export more. In order to increase exports Singapore must increase total production. On a graph this can be represented as a shift along the production axis, as shown in Figure 1. As demand for Singaporean exports by foreign trade partners increases, Singapore undergoes an increase in production. Q1 represents production prior to the increase in foreign demand. Q2 represents the final production in Singapore following the increase in foreign demand. Here we can see that there is an increase in production from Q1 to Q2 due to the increase in aggregate demand. This increase in aggregate demand, or AD is represented by the shift from AD1 to AD2 in the diagram. AD1 represents the aggregate demand in Singapore prior to the increase in foreign demand for exports. AD2 represents the final aggregate demand in Singapore following the increase in foreign demand for exports. Here we can see there is a clear shift right along the production axis, resulting in the shift from Q1 to Q2. Along the Cost axis however, price for the exports remains constant at P1.

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.