Welfare Effects Of Government Intervention In Mahogany Harvesting Essay.

Tax Imposition

1. Tax imposition is one of the regulatory policies applied by government in order to create disincentive for buyers or sellers or both in terms of higher price charged from them. Earning more revenue out of economic activities is another motive behind government imposing tax (Rubinstein 2012). The continuous increase in Brazilian mahogany harvest grabbed the concern of authority that decides to reduce the harvesting by making the goods costlier through tax payment for each unit of production.  

Figure 1: Tax Regulation in Mahogany Harvesting Market

This imposed tax on seller leads to shift of supply curve upward (to S₁) indicating decreased supply in the market to avoid successfully the tax payment. The fall in supply in presence of same demand made pre-tax scenario, leads to higher market price after tax implementation and the equilibrium quantity supplied in the market falls (to Q₁). Tax reduces the mutual exchange between buyers and suppliers that further leads to loss in producer as well as consumer surplus. This leads to forgone social welfare and generates deadweight loss by the area of triangle E₁AE₀

 2. Quota is another regulatory policy implemented by the government that imposes restriction on supplies in the market. It sets limit on how much can be produced and supplied in the market (Seydack 2012). To tackle the growing concern regarding mahogany harvest, government imposed quota on maximum harvest amount. This makes the supply curve vertical at the declared quota amount (at Q1) beyond which the supplier can’t maintain market supply ethically irrespective of the price movement in the market.  The vertical supply curve now leads the equilibrium price at P1 which is pretty higher than the previous equilibrium (E0) that is before imposition of quota. The area of triangle ABC depicts deadweight loss creating a leakage the social welfare. 

Figure 2: Quota in Mahogany Harvesting Market

3. i) The stringent action taken on sellers in terms of punishment can create disincentive to suppliers shifting the supply curve toward left to S The undesirability of mahogany woods and related products to consumers fall in demand that further causes downward shift of the demand curve. The fall in demand captures the changed taste and preference made by the consumer. Equilibrium price and quantity post these changes in demand and supply depends on the quantum of the fall. 

Figure 3: Fall in DD & SS in Mahogany Harvest Market

Demand falling by the same amount of fall in supply keeps the price unchanged though equilibrium quantity falls. Demand falling less than the fall in supply drives price up to P1 and equilibrium quantity is lower than Q0. Demand falling more than the fall in supply brings down the equilibrium price and quantity to P3 and Q3.

3. ii) The fear of punishment and strict action taken against harvesting of mahogany leads to fall in incentive to produce reflected by the shift in supply curve to S₁. The desirability of the mahogany harvest increases reflecting increased taste and preferences shifting the demand curve upward (Tacconi 2012). The quantum of shift in the demand curve determines the equilibrium price and quantity in market. Post shift equilibrium price will be higher for all the cases but quantity supplied can fall, rise or stay constant at Q If demand rises more than fall in the supply then quantity rises and it falls when the increase in demand is less than the fall in supply.

Quota

Figure 4: Change of Taste & Preference in Mahogany Market

 3. iii) The next step taken toward motive of reducing the mahogany harvest is to enforce law and application strict monitoring against illegal harvesting. These lead to drop in harvest made by the producer which shifts supply curve to S₁. Since there is no change in the desirability no shift in demand takes place and further remains constant at previous level. This leads to fall in equilibrium quantity (to Q₁) and price rises to P_1. 

Figure 5: Impact of Monitoring in Mahogany Harvest Market

4. How much the imposed tax affects the buyer or seller depends on the incidence of tax on them. The tax burden is determined by the elasticity of demand and supply faced by each agent. The inelastic demand for mahogany harvests fail to reduce the quantity demanded even though tax imposition leads to higher price of the good. Inelasticity of demand reflects fall of demand by less than one unit for unit rise in price level (Saunders and Reeve 2014 ). The economist focuses on less demand generated in the market as a policy to curb the entire market activity of mahogany harvests.  

Figure 6: Reducing Consumption of Mahogany Harvest

Lower demand even amidst presence of same level of supply will cause lower equilibrium price as well as quantity (shown by P₁ and Q₁). Lower price will cause the producer to drop the harvest and as a whole the purpose borne by the government in order to regulate the harvests would be accomplished.

a) i) The structure of market determines the conditions driving profit maximizing production decision of the producers. Irrespective of the market structure the producers operate till the point where it manages to maintain higher profit out of the production process.

In case of monopoly and monopolistic market the producer produce where marginal revenue gets equal to marginal cost and price is always higher than MR. If we assume mahogany market is monopoly or oligopoly with presence of few sellers then seller maximizes profit at the point of production where MC=MR with falling ATC. 

Figure 7: Profit Maximized Production in Mahogany Harvesting Market

 ii) Before the year 1999, the market operation of mahogany timbers was legal and free of any issues. Post this year government took control of the market regulation that focused on curbed mahogany harvests. Quite surprisingly even amidst presence of various regulation, the demand and supply of the timber were intact creating room for illegal market or shadow market. This was lucrative option for producers since they could avoid imposed tax, lower production cost and drive up the selling price than market price all of which lead to profitable supply. Considering the supplier to be a monopolist the short run production decision would be where MC=MR. Since the operation takes place outside of the market and govt. supervision, the average total cost falls leading to lower marginal cost of the firm. This induce the producer to supply more leading to hike in illegal market supply (to Q_B) with fall in the maximum price being charged. 

Demand and Supply Shifts

Figure 8: Profit Maximized Production in Shadow Market of Mahogany

 iii) Strict supervision and monitoring by government in terms of enforced laws leads to restricted supply made by the seller. They might have to pay tax or follow quota or even stop production all of which are turn off for him as producer. Supplying at previous cost is not possible now and as a result cost can go up discarding producers incentive to supply. The difference in operating cost in the legal and illegal market will drive down to zero if government regulates the black market activities.

b) i) The mahogany timber market is controlled by a small local elite group implying there are few sellers in them market. This reflects oligopolistic market structure operation. The export of the good is conducted mostly by two powerful players indicating presence of duopoly market structure.

 ii) a) There are two producers in the duopoly market and presence of price war is common when they make supply decision and strategy separately. To avoid the loss of profit by biased distribution of it, they enter into a collusion or cartel that help them set price and quantity set at level higher than the market equilibrium level. As a result industry profits also increases and reaches maximized level. Without collusion firms had to share different level or profits with higher share of profit snatched by the price leader compared to the follower in the duopolistic market. Cartel helps them share the profit equally with generating higher profit from market by driving up the market price while lowering quantity supplied.

b)The collusion signed by the duopolist leads to high market price and low supply which causes price to drive up. Higher price creates disincentive in the demand made for them. Low supply indicates lower rate of deforestation that signals good health for the mahogany forests.

c)In the collusion strategy the resulting low level of supply is the decision made by the producers only. This is done to set the market price at much higher level than the equilibrium level (Rios, McConnell and Brue 2013). The result can be fall in demand that matches the low supply and overtime higher prices of harvest would create disincentives for the consumers. As a result in the long run the harvest would fall and that would be sustainable to the Brazilian ecology maintaining the balance of ecology with reduced deforestation than before.

a)z 

Figure 9: Homicide rate for all Para Municipalities for the year 1995 – 2013 

Figure 10:Trend Line of Panel Data Of Homicide Rate

(Source: Author)

b) 

Figure 11;Average Homicide rate for all Para Municipalities for the year 1995 – 2013

(Source: Author)                   

Table 1: Comparison of average homicide rates, municipalities with and without mahogany, different periods

c) The graphical representation based on the panel data of 128 municipalities of Brazil over the time period of 1995-2013, almost 19 years, clearly depicts the higher rate of homicide rate in areas prone to mahogany growth. The trend and pattern implies the overtime increase in the rate. The impact of government intervention and illegal trading is vividly existent (Reboredo 2013). Prior to 1999, there was no government intervention in the mahogany production and trading hence no problem of the homicide rate existed or was low in both regions. During 1999 to 2001, govt. revoked 85% of license regulating the production which pushed the homicide little high in the mahogany growing areas. The rate was pretty lower areas without mahogany. Since 2001, the harvesting was banned strictly and this had greater impact on homicide rate which increased significantly in the mahogany growing areas. This led to presence and increase in illegal transactions (Nicholson and Snyder 2014). Loss and uncertain troubles emanating from this situation ruptured the traders as well as producers that had less scope of recouping that added further to the increased rate of homicides.

Illegal Market Activities

From the study it is evident that the difference between the homicide rates in these two types of region has increased considerably. Post 2008 law enforcements led to remarkably high level of homicide rate in the mahogany growing areas. Though unfortunate for the supplies and traders, the statistics can conclude that the government intervention has been able to reduce though not totally abolished illegal trading of mahogany in the municipalities of Brazil.

a) Mahogany forest is one of the rich components of Amazonian forest lying in the territory of Brazil. The precious natural resources of the country should be well preserved and not destroyed (Gandolfo 2013). But with increased urbanization, pressure of population and growing human need and demand in terms of consumption, yielding profit large scale harvest of mahogany was continued. Government intervened in the scene to tackle the growing issue in form of tax imposition initially with the motive of curbing demand and supply. This could not stand out well in front of the rising and inelastic demand that the market of mahogany timbers faces (Hyman 2014). The regulation in the market and consequent higher price led to operation of shadow market or illegal market in order to earn profit by meeting demands of consumers. Mahogany harvest was not even illegal by then. The next step of the govt. was to revoke 85% of license. This intensified illegal market operation and selling and exporting of the mahogany woods in disguise of other normal timbers increased significantly as per the export data. Thus government regulation and control failed to meet the purpose behind such intervention that intensified black market  trading even though the intervention seem successful on the surface analysis.

b) i)Market failure is evident consequence of adverse self-interest impacting social welfare motives. As per the microeconomic notion, individual are driven by self-interest. But when self-interest of one creates external impact on other social agents that leads to larger social marginal cost exceeding social marginal benefit (Feenstra 2015). This also indicates inefficient allocation of resources that fails to produce maximum social welfare. Unregulated harvest would induce the producers keep on harvesting randomly to meet their self-interest of profit out of the supply in market  (Grogan et al. 2013). Production than the social desirable level would create inefficient and adverse social impacts. The most dangerous impact could be ecological misbalance and threat of existence of the species surviving in such forests.

ii) a. Apart from government regulation imposed on the local producers and traders, another market based solution can be shifting the location of mahogany production and harvests in other countries in order to nullify the existent ecological issue growing around random deforestation (Canto, Joines and Laffer 2014). Brazil enjoys geographical advantage of possessing such rich natural resource at its heart. Now if Brazil stops this production and prefers importing the good from other regions then it has to provide some other good to those regions in exchange. The exchanged good would be in line of the production in which the country enjoys comparative advantage which helps it inflict lower opportunity cost engaged in production (Free et al. 2014). After shifting the location of growing mahogany is Brazil is asked to produce mahogany timbers then that would raise the opportunity cost because it would have to produce something in which it does not have advantage and cutting back the production having comparative advantage (Copeland and Taylor 2013). This trade off falls adversely on the economic performance of the country. For one unit production of mahogany harvests, it has to let go some unit of the production of the goods which it was producing comparatively advantageously. Thus growing mahogany now would inflict higher opportunity cost.

The contextual analysis presents how government regulation was imposed as one of the solution to the issue revolving around random harvesting of mahogany. The consequences that have been identified are pretty shocking with leading rise in the illegal market and trading activities (Zimmerman and Kormos 2012). The export trend shows increasing trend the more government shifts to stricter regulations leading to lesser actual impact of the government motive. In such scenario, another most important solution can be generating and boosting social awareness that can effectively reduce both the supply and the demands operating in the market (Barbosa 2015). Social campaigns and awareness programs have large scale impact on the issue since this would act as an important element to make shift in both supply and demand decision from the core

Reference

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