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

This article, 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.

Meat product social cost** from Gene Hayward

A new tax on home buyers in Vancouver. A speed bump or pothole?

The purpose of some types of targeted taxes is two fold.  One is to raise revenue and one is to change the behavior of markets participants from doing something that is perceived as a societal negative.

The provincial government of British Columbia ("BC") has decided that the Vancouver housing market is a proper tax target:

The foreign buyer tax leaves us with the wrong kind of speculator

""This week, the B.C. government announced a new 15-per-cent property transfer surtax to be applied to all foreign buyers of residential property in the Greater Vancouver Regional District, effective on transactions closing on or after Aug. 2, 2016. The objective of the tax is to curb foreign speculators from investing in residential real estate in the GVRD and help to cool the rise of prices.""

The focus of the article is to suggest that this tax will create wrong incentives for market participants and will make the market more volatile and higher-risk.  It is a very interesting point and one I encourage you to read about.

However, with this posting I just want to look at the simple supply and demand issues the tax will/may create in the housing market there.

My overall sense is that the tax may slow down the increase in prices of house, at best.  But because of things OTHER THAN the price of housing in Vancouver, such as economic growth and increasing jobs/income, the price of housing will simply continue to increase.

This is a supply issue for the most part (or all part).

Here are the slides with explanations.

Negative Externality Example: The cost of methane damage to the environment.

This graphic comes from a study I found on the National Bureau of Economic Research (NBER) website.  It is a study that suggests producers and consumers of natural gas do not cover the "true cost" of delivering natural gas for consumption.  The concern is the climate unfriendly methane from the gas that is lost to the environment through unrepaired and/or neglected pipelines.

These "external costs" (Blue Bar) are not borne by producers nor consumers of natural gas but none the less are imposed on society in the form of environmental degradation.  

If those costs were internalized within in the market, then the cost of producing natural gas would be considerably higher.  This would be reflected in a Supply Curve that includes the private cost of producing AND the social costs as well.

The result would be a product that has a market price that is higher and a market quantity that is less than the market would produce.

Below are a series of graphs that illustrate "what SHOULD be" (the "Socially Optimal") in terms of the market outcome if those external costs were internalized in the market.

Because those costs in "real life" are not internalized, then the market creates "Dead Weight Loss"---a quantity of the good that is produced where the marginal cost is greater than the marginal benefit, as noted by the price consumers are willing to pay. This is denoted by the Red Triangle in that last slide .

Corn killed Bubba Gump Shrimp. "That's all I have to say about that". See how here.

Source: Big Picture Agriculture

Kay MacDonald over at Big Picture Agriculture has this graphic showing the "Dead Zone" in the Gulf of Mexico just off the coasts of Texas and Louisiana and the following comment:

"This year’s Deadzone in our Gulf of Mexico waters will be about the size of Connecticut. It is estimated that the Dead Zone causes losses of $82 million per year to the seafood and tourism industries. 

Much of it is caused by corn cropland fertilizer runoff that ends up going down the Mississippi River. Corn used to fuel cars – cropland used to feed cars, not people. In contrast, a healthy Gulf of Mexico sans Dead Zone would be capable of growing more shrimp, crabs, clams, and fish which humans love to eat."

This clearly illustrates an important concept in AP Microeconomics: Negative Externality.

Negative externalities occur when the production of a good imposes a cost (or costs) on third parties not involved in producing or consuming the good.

Farmers grow corn. The fertilizer used in the process becomes part of the run-off from irrigation and/or rains that make their way to streams and rivers then eventually the Gulf of Mexico in this instance.  The chemicals in the fertilizer destroy/damage the aquatic ecosystem that allow shrimp and other sea creatures to thrive.

Each farmers contribution to the problem is small but in the aggregate all farmers along the waterways that feed the Gulf of Mexico cause approximately $82 million dollars in lost revenues to fisherman of all types along the Gulf Coast.

This loss in revenue (a cost) is borne by the fisherman ("Third Parties") and not by the farmers and/or consumers of corn.

There are potentially 3 solutions to this problem:

(1) tax the producers and/or consumers of corn up to at least the amount of the damage--$82 million.
(2) impose a regulation forcing farmers to prevent the run-off hence the damage to the Gulf
(3) Farmers collectively agree to pay the fisherman $82 million for the damage they cause ("Coase" solution).

All 3 of these "internalize" the monetary value of externality and require the parties to the actual transaction to bear the full cost of the damage they impose.

Seems fair, doesn't it?

AP Microeconomics lesson on Negative Externalities. Nice real life example!

A report by the US Dept of Agriculture suggests LOTS of food in the US goes to waste. They estimate that 31% of food produced and sold to consumers in 2010 was not consumed and disposed of in a variety of ways.  The report is interesting and has some nice pie chart graphics that are suitable for showing in class for  a variety of academic disciplines. The food chain affects many segments of the society. The link is HERE

What caught my eye in the report was the passage below.  It speaks directly to an important concept in AP Microeconomics that we study in the unit on Social Cost and Social Benefits of production and consumption.

It gives an EXCELLENT definition of Negative Externalities and some appropriate examples:

Perfect opportunity to show with Supply and Demand graphs how this plays out in terms of Price and Market Quantity as we search for the "Socially Optimal level of production" at a "Socially Optimal Price".

The point of this analysis is to illustrate the Dead Weight Loss that occurs to society from the uncompensated costs/damage that is done to parties OTHER than the ones directly involved in the production or consumption of a good. It in some measure represents the explicit Opportunity Costs of the good in question.

The good I am going to use in the slides below is "Hamburger Meat".  Beef production is pointed out in the Dept of Labor report as a pretty large offender in creating Negative Externalities.

Slides have the relevant explanation on them.  Hope this helps you understand this concept better.

Look at this last slide. Place your cursor at any point between "Q1S.O. and Qe".  Move up thought the blue Dead Weight Loss triangle until you get to the "S1=MSC" curve.  At that point the Marginal SOCIAL Cost of producing that Quantity is GREATER than (now go DOWN to the "D=MPB" curve) Marginal PRIVATE Benefit of producing that Quantity.

We will want to move DOWN and to the LEFT on the MSC curve and UP and to the RIGHT on the MPB curve until we reach Point "C" where Marginal Social Cost = Marginal Private Benefit.

Anywhere in the BLUE triangle represents production costs that are not being covered by the paying consumer.