A-Level Economics Model Answers
Using the concepts of external costs and market failure, examine the possible economic effects of farmers "burning more rainforest to turn land into cattle ranches and into field for growing crops" (Extract 2 lines 5-6). Use an appropriate diagram in your answer.
Here is a question and answer from the market failure section of the A-level Economics syllabus.
This is an examine question- the type of question where students have to write a long essay.
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Using the concepts of external costs and market failure, examine the possible economic effects of farmers "burning more rainforest to turn land into cattle ranches and into field for growing crops" (Extract 2 lines 5-6). Use an appropriate diagram in your answer.
This question asks you to think about the possible economic effects of burning the rainforest. You’ll need to think about the structure; there are many ways you could structure this.
Here is an example of how you could approach this question.
Remember to insert your diagram.
FREE MODEL ANSWER GUIDE - INFORMATION IN EXTRACT BELOW
Possible definitions
Market failure occurs when the free market mechanism fails to allocate resources efficiently. Negative externalities can cause market failure as the free market does not take them into account, which in turn, has a negative effect on a third party that isn’t paid for.
In this case, negative externalities occur when the rainforest is burned down to turn land into cattle ranches. This is known as a negative externality of production because a ranch’s production process is causing harm to the environment. Some of the harm as mentioned in the extract is the “400 million tonnes of carbon dioxide”. If the market is totally free, farmers would continue to emit negative externalities such as these without covering the external cost to the environment and society.
Negative Externality Problem - The Brazilian Rainforest
In the diagram above, we can see the effects this has on society. MSC > MPC due to the external cost of production. The triangle ABC is known as the welfare loss to society by producing at point A, which is the free market allocation. The optimal allocation of resources would be point B, a socially efficient level which takes into account externalities and equalises social cost and benefit. This is at the point MSB = MSC.
Therefore, burning more land would most likely cause increased envionrmental market failure due to the negative externality problem.
However, this is only the case if we are currently operating at a point to the right of point B in the diagram. To be socially efficient, the condition MSB = MSC has to be satisfied, so if there are positive externalities of farming which outweigh the negative externalities of farming then decreasing production would not necessarily be a good thing.
The positive externalities of cattle ranches and growing crops would be the decrease in unemployment and increased income in the local areas. Other problems that plague Brazil, such as poverty can be countered by using the rainforest land for farming purposes instead. It all comes down to whether or not there is a net benefit to be had by burning down the rainforest and using that land for other purposes.
The President of Brazil has suggested increasing the use of land for these reasons, but instead try and use the land sustainably, by planting more trees elsewhere for example, also as mentioned in Extract 2 on line 8.
Overall, farmers using land for cattle ranches or for growing crops does yield negative externalities in production. But what also must be considered are the positive externalities these activities bring to society also. It is also very difficult to calculate exactly how much damage burning the rainforest does and how much that damage is worth, so it is likely that there is a welfare loss from burning down the rainforest, but we cannot be sure exactly how much society loses.
Extract information
Cattle farms damaging the rainforest Deforestation in Brazil releases an estimated 400 million tonnes of carbon dioxide into the atmosphere every year, making the country one of the biggest emitters of the gas in the world. An average of 7,330 square miles of rainforest has been lost each year since 1995. The destruction of rainforest has accelerated over the past few years due to soaring beef and soya prices. Farmers are burning more rainforest to turn land into cattle ranches and into fields for growing crops. However, the President of Brazil announced plans to reduce deforestation by subsidising sustainable development projects. These include replanting trees and creating eco-friendly tourism as alternative means of providing employment and income for local communities. The amount of funds made available has not been revealed. The proposals also include an increase in the policing of forested areas and severe penalties for those breaking the law through illegal logging and farming.
(Source: © Guardian News & Media Ltd 2008, adapted from ‘Brazil sets target to slow Amazon deforestation’, by David Ljunggren)
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