Environmental Economics

Student question on farm subsidies

From the inbox [edited for length]:

Dr. Haab

My name is [blank] and I was in your AED Econ 200 class this past fall quarter. One of my classes this quarter was Rural Sociology 378 which focuses on globalization of the world's economy and how it affects the rural populations of countries...My professor proceeded to tell the class that the main cause of [the expolitation of Jamaican grain farmers] was the farm subsidies given to US farmers...I was wondering if maybe you had any more information regarding subsidies (how they work, who gets them, why they are good/bad). I feel that they are a good thing for most US farmers. I know the professor got some of the information wrong and I called him out on it but I feel really uneducated about them...I wanted another opinion on the issue because my rural sociology teacher is obviously not an economics professor. I'm just curious to hear your take on the issue of farm subsidies.

You asked for it...

Another inelastic demand example (this time it's not gas)

From the Columbus Dispatch:

FirstEnergy will spend six years and $1.5 billion by 2011 to settle a pollution lawsuit and meet federal clean-air rules at one of its power plants.

By then, three massive scrubbers and two huge filters will operate at its W.H. Sammis coal-fired power plant along the Ohio River, helping remove thousands of tons of pollutants that cause smog, soot and acid rain...

All the work must be completed by 2015 to comply with federal law. Much of the cost will be passed to customers.

Supply decreases, prices go up.  By how much depends on the elasticity (flexibility) of demand.  Since the demand for electricity is inflexible, much of the cost increase is passed through to consumers.  Now whose fault is that?

Env-Econ 101 Case Study: Inelastic Supply

We spend a lot of time talking about the elasticity of demand: That is, how consumers react to higher (or lower) prices.  Just as important, but less often mentioned--probably because it's harder to measure--is the elasticity of supply:  How does the amount producers produce react to higher prices?

First, some motivation:

Some kinds of fertilizer have nearly tripled in price in the last year, keeping farmers from buying all they need. That is one of many factors contributing to a rise in food prices that, according to the United Nations’ World Food Program, threatens to push tens of millions of poor people into malnutrition.

Env-Econ 101: Who pays a tax? (Part 2)

In part 1 of 'Who pays a tax?' we explored the case of simple per unit sales tax on sellers.  That is, for every unit sold the seller must pay $X to the government.  The net effect of the tax on sellers is to increase the price that buyers pay, but not necessarily by the full amount of the tax.  Buyers pay part of the tax and sellers pay part.  In part 2, we will:

1. Look at a per unit tax on buyers and compare it to the case of a tax on sellers.
2. Look at what affects the distribution of the burden of the tax.

Env-Econ 101: Who pays a tax? (Part 1)

Last week, in response to my post on gas taxes, an anonymous commenter asked:

Don't consumers pay 100% of all corporate taxes? Otherwise, where does the money come from?...Are you saying that if the corporation reduces the profit margin, then the corp is paying the tax? and if the corp raises the price, the consumer is paying the tax?

Great question, and one we haven't yet addressed in our Env-Econ 101 series.  So here goes:  If a producer is taxed, who bears the burden of the tax?

Who pays a gas tax?

Exxon pays roughly $40B in tax each year.  According to standard economic theory, they don't really pay that tax, much of it is borne by the consumer in the form of higher gas prices.  How much the consumer pays depends on the relative ability of consumers and producers to react to higher prices.  Since it is widely agreed that consumers are less responsive to gas prices than producers, it is widely agreed that consumers pay the majority of Exxon's tax bill.  But do they? 

All time high gas prices? It's time to rev up the law of demand anecdotes

Gas prices force decision:

Of nearly four dozen drivers interviewed at Charlotte-area pumps Tuesday, more than half said they've made some change to save -- from buying a gas-sipping car to running fewer errands.

Others said they were annoyed by the prices but able to absorb the extra costs, for now. But if it gets much higher, some said they'll drive less or ride bikes.

...

Carol Gifford, a spokeswoman for AAA Carolinas, said the average per-gallon price will probably set a new Charlotte-area record this month, if not today. The average Tuesday was $3.209, just shy of the all-time high of $3.211 set September 2005, following disruption of refinery operations from Hurricane Katrina.

The microeconomic principle of demand | Q.E.D.

Hello recession, how are you, have you been all right? through all those lonely, lonely, lonely, lonely nights

That's what I'd say. I'd tell you everything. If you'd pick up that telephone. ... Do wop, doobie do wop, .... (U.S. Payrolls ...):

U.S. employers cut payrolls for a second straight month during February, slashing 63,000 jobs for the biggest monthly job decline in nearly five years as the labor market weakened steadily, a government report on Friday showed.

The Labor Department said last month's cut in jobs followed an upwardly revised loss of 22,000 jobs in January instead of 17,000 reported a month ago. In addition, it said that only 41,000 jobs were created in December, half the 82,000 originally reported.

The back-to-back January and February job losses were the first consecutive monthly declines since May and June of 2003.

I'm heading home to recession proof my basement (mental list: peanut butter, bread, saltine crackers, canned soup, beer, Little Debbie oatmeal creme pies).

 

Ethanol Domino Quote of the Day: “I think we need to tell the American consumer that prices are going up”

I've been saving the picture on the right* for a year an a half waiting for just the right occasion.  This seemed like it.  From the Financial Times:

When William Lapp, of US-based consultancy Advanced Economic Solutions, took the podium at the annual US Department of Agriculture conference, the sentiment was already bullish for agricultural commodities boosted by demand from the biofuels industry and emerging countries.

He added a twist – that rising agricultural raw material prices would translate this year into sharply higher food inflation.

Haagen-Dazs* understands econ 101

Econ 101:  If the supply of an input decreases, driving input prices up, the supply of the associated output decreases, drving output prices up.  Like this:

Haagen-Dazs is warning that a creature as small as a honeybee could become a big problem for the premium ice cream maker's business.