Wednesday, August 9, 2017

Negative Externality: Meat industry blamed for largest-ever 'dead zone' in Gulf of Mexico

suggests that the market quantity for meat products is greater than it should be.  The chemical run-off of fertilizers and other agricultural inputs that go into the production of meat products flow into waterways.  Its negative affects go much further than the borders of the farms and ranches. Some excerpts:
"Toxins from manure and fertiliser pouring into waterways are exacerbating huge, harmful algal blooms that create oxygen-deprived stretches of the gulf, the Great Lakes and Chesapeake Bay, according to a new report by Mighty, an environmental group chaired by former congressman Henry Waxman... 
...Nutrients flowing into streams, rivers and the ocean from agriculture and wastewater stimulate an overgrowth of algae, which then decomposes. This results in hypoxia, or lack of oxygen, in the water, causing marine life either to flee or to die... 
...America’s vast appetite for meat is driving much of this harmful pollution, according to Mighty, which blamed a small number of businesses for practices that are “contaminating our water and destroying our landscape” in the heart of the country..."
If the problem IS production over a more "socially optimal" level of production, how do we attain that optimal level?

The essential problem is that the cost of the externality is not being borne by the consumer or producer of the product.  Consumers are paying and producers are receiving only the money cost to make the product available. They are not paying for the residual costs of environmental degradation that affect others near and far (out into the Gulf of Mexico!).

Our task here is to use the basics of Supply and Demand to illustrate how markets respond to government intervention in order to require Producers and/or Consumers to "internalize" that "external" cost that has been imposed on the rest of society.

Internalizing that cost can take the form of an explicit tax on the good or some other "non-monetary" rule or regulation that de facto internalizes the cost of producing the good.

I put together a short-ish presentation to show you how this is modeled for AP Microeconomics. The key here is to correctly identify the "area of Dead Weight Loss" in the presence of a Negative Externality.


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