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Theory And Measurement Of Economic Externalities

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Question:

Discuss about the Theory and Measurement of Economic Externalities.
 
 

Answer:

Introduction:

The essay focuses on the economic analysis of the article on discovery and effects of new genes on the bread wheat production in Australian economy. The article says that researchers have found 21000 new variety of genes in 16 different varieties of wheat. Also the variations among the common wheat varieties have also been discovered. According to professor David Edwards, these new discoveries could help in the creation of disease resistant wheat varieties as well as it could open up opportunities in the wheat production in the world. Hence, this discovery of new genes has a positive effect on the horticulture industry of Australia. This not only would increase the variety of wheat to be produced, but it would improve the quality of wheat also by making it disease resistant (Logan, 2017).

The market for wheat is a market with perfect competition. Here, the product is homogeneous; there are many buyers and sellers; a single seller has no power to influence the market price, hence, the sellers are price taker (Kirzner 2015). The discovery and application of new disease resistant genes in the wheat is going to increase the supply of the wheat in the market. As better quality of wheat is ensured, and disease resistant genes ensure that the level of crop damage due to diseases is reduced, the supply of wheat will rise in the market (Tomek & Kaiser, 2014). 

The above figure shows that initially the market equilibrium is at E1, with price P1 and quantity supplied Q1. With the introduction of new genes in the wheat varieties, the crop damage is reduced and better quality is supplied. Thus, supply of wheat rises in the market, and supply curve shifts rightward from S1 to S2. In the short run, demand will not change as the income and preferences of the consumers do not change. Thus, there is excess supply in the market at the initial price P1. To absorb this excess supply, the producers will decrease the price to P2 to reach the new market equilibrium at E2. The new equilibrium price is less than the initial equilibrium price and quantity is more than the initial quantity supplied.

Price elasticity of demand is the change in the quantity demanded due to one percent change in the price of the product. As wheat is an agricultural product and it is a necessary good; hence, wheat is relatively price inelastic. Even if the price changes, the demand for wheat does not get affected much (Thimmapuram & Kim, 2013)

 

Figure 2 shows the impact of price changes on the quantity demanded of wheat. As it is an agricultural and necessary product, changes in the price will not affect the quantity demanded much. It has a relatively inelastic demand curve. When the supply increases, the supply curve shifts rightwards to S2 from S1. The price falls from P1 to P2. Due to price inelasticity, the fall in price does not have a significant effect on the quantity demanded, as it rises from Q1 to Q2. Thus, revenue of the producers will not increase much (Wang & Dalal, 2015).

The discovery of new genes in the wheat varieties has a positive externality on the wheat production. Researchers assure that this new invention would help in the production of better quality and disease resistant wheat. The benefit will be enjoyed by everyone in the society. However, in this case, consumers will enjoy better and more bread wheat at a lower price. Therefore, producers might incur losses, as they would spend more for better quality seeds but would get less revenue. To solve this problem of positive externality, the government can give subsidies to the farmers. This subsidy would increase the revenue of the farmers, while the consumers do not have to pay extra price (Lin, 2014).

This essay has discussed the possible effects of the discovery of new genes in the wheat varieties as highlighted in the article, and the impact on the prices of wheat. The new 21000 genes in 16 varieties of common wheat breed are opening a new direction in the wheat production in Australia. This would not only offer better quality of wheat but also increase the supply, as diseases in the crop would be reduced. As demand remains unchanged in the short run, the price of wheat would fall and revenue would not increase much. Hence, to prevent the effects of positive externalities, the government should provide subsidies to the farmers.

 

References:

Kirzner, I. M. (2015). Competition and entrepreneurship. University of Chicago press.

Lin, S. A. (Ed.). (2014). Theory and measurement of economic externalities. Academic Press.

Logan, T. (2017). Scientists make discovery that 'shakes up' foundations of wheat genome research. ABC News. Retrieved from https://www.abc.net.au/news/rural/2017-03-09/researchers-find-new-bread-wheat-genes/8337326

Thimmapuram, P. R., & Kim, J. (2013). Consumers' price elasticity of demand modeling with economic effects on electricity markets using an agent-based model. IEEE Transactions on Smart Grid, 4(1), 390-397.

Tomek, W. G., & Kaiser, H. M. (2014). Agricultural product prices. Cornell University Press.

Wang, W., & Dalal, R. C. (2015). Nitrogen management is the key for low-emission wheat production in Australia: A life cycle perspective. European Journal of Agronomy, 66, 74-82.

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