It is apparent that the original supply curve is indicated by S1. However, in response to the producer tax, the supply curve shifts upwards (S2) to indicate a decrease in supply due to higher cost. As a result, there is an increase in the equilibrium price (P2 to P1) and corresponding decrease in the equilibrium quantity (Q2 to Q1) considering the new point of intersection between the demand curve and the new supply curve. Further, there is a decrease in both the consumer and producer surplus as indicated by the stripes areas. Earlier, the deadweight loss was zero but due to imposition of the producer tax, deadweight loss has arisen. Hence, it may be concluded that welfare is adversely impacted due to imposition of producer tax.
Imposition of quota makes sense at a value which is less than the equilibrium quantity which is the case here. As a result, there is a clear demand supply mismatch as the demand is higher while the corresponding supply bounded by the quota is lower. As a result, there is an increase in the price which is clearly highlighted in the above diagram. In this process, the consumer or buyer surplus tends to decrease as they have to pay a higher price. On the other hand, the producer or seller surplus tends to increase as they are able to receive a higher price for mahogany. However, in the process there is a deadweight loss which earlier was not present and clearly, the imposition of quota leads to decrease in overall welfare.
(i) Since producers fear punishment, hence there would be a decrease in the overall supply caused due to shifting of the supply curve in the upwards direction. Further, since there is stigma associated with consumption of mahogany products, thus, there would be a decrease in the demand as well which would be indicated by the shift of the demand curve in the downwards direction.
As apparent from the graph above, while the equilibrium price remains the same on account of balancing movement by the demand and supply curve but there is a significant decrease in the equilibrium quantity as indicated by a shift from Qo to Q1.
(ii) Since producers fear punishment, hence there would be a decrease in the overall supply caused due to shifting of the supply curve in the upwards direction. Further, since there is pleasure associated with consumption of illegal mahogany products, thus, there would be a increase in the demand as well which would be indicated by the shift of the demand curve in the upwards direction.
(iii) Since producers fear punishment, hence there would be a decrease in the supply as the harvesting would be lesser and also certain producers may shift to other tropical woods that are legal to harvest. This would cause a shift in the supply curve in the upward direction. Further, since there is no change in the desirability, hence the demand curve would not alter.
If the mahogany demand is very elastic, then according to the economist, the move by the Brazilian government to impose producer tax would not be effective in dealing with the problem.
It is apparent that the demand curve is highly inelastic considering the steep slope. As a result, it is apparent that when the government imposes tax on the producers, a majority burden of this tax is passed on to the consumers as the net impact on quantity demanded would be proportionately very less as is visible from the graph above. Even though the price for the consumers has increased from P to P1, the corresponding decline in quantity from Q to Q1 is quite small. As a result, the tax has not provided much respite as the quantity demanded is only slightly impacted.
A more viable solution for the problem would be to decrease demand which can be done by providing cheaper alternatives in the form of other tropical woods which are similar in quality but are significantly lower in terms of price. Additionally, the government should launch an awareness campaign so as to educate the major consumers on the impact of continuous mahogany on the environment and the problem of deforestation. With the decreasing demand, the price and quantity both will fall and the objective of the government would be fulfilled.
It is apparent that there are a number of producers or sellers coupled with lack of any entry or exit barrier. This indicates that the mahogany timber market is a perfectly competitive market. A key feature of this market is that the firm is a price taker and the price is decided by the underlying demand supply forces in the industry.
It is apparent that the price for a firm is driven by the industry dynamics. The equilibrium price P1 is the same which would apply to the individual firm as well. The other production decision is in relation to the quantity produced which is determined by MR=MC. The profit maximising quantity q1 is decided in this manner.
As a result of the revocation of the licence which is not enforced, there would be illegal harvesting firms which would tend to enjoy incentive (in terms of lower regulatory cost) and hence higher profits over the short term. This is indicated in the graph below.
The coloured graphs tend to represent the picture for illegal firms which tend to earn higher profits in comparison with legal harvesting firms. The cost for these is lower as apparent from the lower cost which ensures higher equilibrium production coupled with higher profitability which acts as an incentive for these illegal firms to continue their operations.
If the government starts enforcing the law in a serious manner, then there would be a crackdown on the illegal harvesting. As a result, there would an alteration in the operating costs of the legal and illegal harvesting firms. For the legal harvesting firms, there would not be any increase in the operating cost but it would be the case for illegal harvesting firms as if caught they would have to pay heavy fines and thus, engaging into illegal harvesting would become non-lucrative. Instead, interested firms would like to engage in legal harvesting.
i) It is apparent from the description given that the market is dominated by few players and has a high concentration index. As a result, the market structure applicable would be oligopoly and can be narrowed down to a duopoly where the market has two prominent suppliers which is the case here. In such a market structure, the suppliers tend to have immense control over the price.
It is apparent that the firms are colluding instead of competing with each other. In such a situation, the market structure would be similar to monopoly and the profit objective would be served for the two firms. T
The profit maximising condition tends to be MR=MC. In collusion, there is an incentive for the cartel to ensure that the profitability is maximised. As a result, the equilibrium quantity is decided at the point where an artificial shortage is maintained so that price charged can be maximised. The profits are maximised for the industry when the firms collude or else under competition the equilibrium quantity would have been much higher and also equilibrium price would have been much lower.
The collusion would have a positive impact on the mahogany tree population. This is because by forming a cartel, the market structure tends to behave like a monopoly. In this market, as explained above the output produced would be lesser than the optimum output which would be case when the two firms would compete or in a perfectly competitive market. Hence, less mahogany trees would be chopped down.
Collusion between the mahogany kings is not a sustainable strategy as they are solely driven by profits and in the long run the prices would become unsustainable due to which the cheaper alternatives in the form of other woods or mahogany supply from other geographies may step up. This is apparent from the case of OPEC which is oil related cartel and in the long run as prices tend to go over the roof, the buyers are shifting to other cheaper means of energy. In the long run, similar behaviour could be witnessed for mahogany.
The highlight the increase in homicide due to the associated violence linked with illegal mahogany harvesting which is apparent between 2001 and 2008 when illegal harvesting was rampant. This is also supported from the above table which indicates that between 2001 and 2008, there was huge difference in the homicide rate in areas with mahogany and the areas without mahogany.Hence, there is clear evidence of violence being linked to illegal harvesting of mahogany.
Taxation on producers is not effective especially when the demand is inelastic. Hence, it makes sense that the government alongside must also take prudent measures to lower the demand by providing viable cheaper alternatives and highlighting the adverse effect of consumption.
The government intervention can have unintended consequences which is apparent from the rising homicide rate during the period of government intervention. Additionally, enforceability is also a pivotal aspect which essentially determines the output. In case of weak enforcement, illegal operations can have lower operational cost and hence more profitable than legal operations.
Market does not tend to take into consideration the positive or negative externality associated with a particular activity. Further, the market price does not refer to the social benefit that a particular product may provide. For instance, the price of mahogany does not reflect the social benefit it provides by maintaining the environment in equilibrium and fighting climate change in a ecologically sensitive and diverse region. Clearly, the chopping off of these trees has an adverse effect on the environment and hence has a negative externality attached. This is not factored in the price due to which the consumption tends to be higher than the socially desirable output. As a result, there is a need for government intervention to ensure that the consumption is regulated.
Considering that Brazil had a natural advantage in growing Mahogany, hence shifting to other geographies would imply that the cost of production would be higher for these countries in comparison to Brazil. As a result, the prices of Mahogany would also increase considering the robust demand and higher cost.
It is imperative that there needs to be a decrease in the demand. One alternative is to promote other tropical woods which are available in relatively larger volume and are similar in terms of quality. Additionally, the consumers must be made aware of both the short term and long term impact of mahogany chopping for not only Brazil but also globally so that there is change with regards to societal attitude towards Mahogany and usage of the same may be considered social stigma or related to environment insensitivity.
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