Economic Analysis of Mahogany Harvesting

The assignment examines the consequences of banning mahogany harvesting in Brazil, including its effect on homicide rates. It proposes alternative solutions such as Reduced Impact Logging (RIL) to minimize environmental damage and suggests focusing on reducing demand rather than imposing strict restrictions. The report references various academic sources and publications for research.

ABOLITION OF
MAHOGANY HARVESTING,
INCENTIVES AND
HOMICIDE

TABLE OF CONTENT
INTRODUCTION...........................................................................................................................1
TASK AWELFARE EFFECTS OF GOVERNMENT INTERVENTION.....................................1
(A)................................................................................................................................................1
(B)................................................................................................................................................3
(C) (i)............................................................................................................................................3
(C) (ii)..........................................................................................................................................5
(C) (iii).........................................................................................................................................6
(D)................................................................................................................................................6
TASK B PRODUCTION DECISIONS...........................................................................................7
A. (i).............................................................................................................................................7
A. (ii)............................................................................................................................................8
A. (iii)...........................................................................................................................................9
(B) (i)..........................................................................................................................................10
B. (ii)..........................................................................................................................................10
(i)................................................................................................................................................10
(ii)...............................................................................................................................................11
(iii)..............................................................................................................................................11
TASK C IMPACT ON THE HOMICIDE RATE.........................................................................12
(A). Constructing a graph...........................................................................................................12
(B) Average homicide rate for para municipalities with and without mahogany for different
period.........................................................................................................................................14
C. Results...................................................................................................................................14
TASK D LESSONS AND REFLECTIONS.................................................................................15
A.................................................................................................................................................15
B. (i)...........................................................................................................................................15
B. (ii) 1.......................................................................................................................................15
B. (ii) 2.......................................................................................................................................15
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................17

INTRODUCTION
Brazil is the main producer of big leaf Mahogany timber however; in 2001, excessive
destruction of Amazon and decrease in number of trees tends to create eventual abolition of
mahogany harvesting. Imposing restriction by Brazilian government on mahogany harvesting
and declare it as an illegal activity may leads to bring unintended consequences of homicide
which cannot be resolved through a justice system, however, in contrast, when the mahogany
harvesting is legal then the disputes can be easily settled through justice system. Therefore, the
key aim of the report is to examine the welfare effects of governmental intervention in the field
of mahogany harvesting along with the production decisions and its potential impact on the
homicide rate. The research will particularly answer two choices that are the impact of
intervention of Brazilian government on equilibrium price, quantity and welfare and whether the
ban will results in high rate of homicide.
TASK AWELFARE EFFECTS OF GOVERNMENT INTERVENTION
(A)
Demand curve reflects the quantity of mahogany demanded at a given price level
therefore, the curve reflects downward slope whereas supply curve demonstrates the quantity of
mahogany supplied by producers at different prices. In the given case, it is stated that Brazilian
government introduced a tax on mahogany producers on each of the ton produced (Grogan and
et.al., 2016). The tax will have a direct impact on the supply quantity, which will affect the
equilibrium point (demand = supply) illustrated in below diagram:

From the graph below, equilibrium point before the tax is plot as E1 at a demand of Q1 and
price at P1. However, after the tax imposed by the Brazilian government, the supply curve shifted
upward from S0 to S1 at a new equilibrium point of E2 , price at P2 and quantity of Q2. Area E1E2C
presents deadweight loss due to the taxation imposed by the government. Thus, it becomes clear
that tax resultant increase in price and decline in mahogany quantity (ton) supplied.

(B)
In this particular case, Brazilian Government introduced a harvesting quota so as to put
production control or restrictions upon the quantity of mahogany harvested.
Graph demonstrates that before the quota, E1 was equilibrium point at P1 price and
E1Q1supply quantity. However, after putting quota restriction as presented, it can be seen that
new equilibrium designed at P0 price. Hence, it can be said that quota restricted the production
quantity from OQ1 to OQ0 and resultant high price to OP0 and welfare change is –c-d (Rios,
McConnell and Brue, 2013).
(C) (i)

As illustrated, if mahogany producers fear of punishment and its consumption becomes
undesirable among consumers because of the stigma associated with product possessing, then, it
will resultant upward movement in supply curve and downward movement in demand curve
from S1 to S2 and D1 to D2 that declined trade quantity from Q1 to Q2 and increase in price from
P1 to P2 at EP of E2.

(C) (ii)
Looking to the graph, it is visualized that if consumers demand more quantity of
mahogany while on the other side, producers fear from the punishment as its harvesting seems
illegal, then, new demand & supply curve created at D2 and S2 which changed EP from E1 to
E2. It leads to increase in product price due to high demand but less supply however, trade
quantity unaffected high demand is offset by decrease mahogany harvesting (Case, Fair and
Oster, 2014).

(C) (iii)
As per the graph, it can be seen that in 2008, Brazilian government enforced strict law &
impose penalties on illegal mahogany harvesting which turnout supply curve from S1 to S2,
however, demand curve seems unaffected due to no change in consumer desirability (Canto,
Joines and Laffer, 2014). As per the figure constructed above, quantity traded came down from
Q1 to Q2 whilst price rose from P1 to P2.
(D)
Inelastic demand showcase that with the change in mahogany prices, consumer demand
will not be affected to a great extent as it shows a very little bit changes.

Above graph presents inelastic demand curve titled as D, before the tax imputation,
supply curve was S1 whereas after the tax, it moved upward to S2 reached to new EP to E2. In the
graph, government taxation on mahogany resulted high increase in price from P1 to P2
represented by area “a” however, demand shows a little bit decrease from OQ1 to OQ2. This is
the logical reason why economist advices the government to reduce demand.
TASK B PRODUCTION DECISIONS
A. (i)
As the scenario presents that there are numerous competitors with no entry & exit barriers
for mahogany production, it present the market characteristics of perfect competition. Profit
maximization is the result of excess of revenue over cost.

In the graph, it is clearly presented that producers involved in legal harvesting of
mahogany supplies goods at OP price at a cost of OP therefore, excess covered by area PABC
indicates maximum economic profit. Besides this, it can be seen that MC cuts AC at its lowest
point and moves upward and MC is lower than MR therefore, suppliers earned abnormal return
over their production (Farboodi, Jarosch and Shimer, 2017).
A. (ii)
In 1999, government revoked harvesting license, still, illegal producers do not need to
meet any regulatory requirements and no need to pay taxes also, and this is the reason, why they
can produce goods at cheaper rates illustrated below:

In the illustrated graph, cost of illegal wood production reported to OEDQ less than that
of legal production as it was OCBQ therefore, it clearly presents that illegal wood producers
have earned an additional abnormal return of CBDE over maximum profit earned by legal wood
producers.
A. (iii)
If Brazilian government attempts to enforce strict laws and regulations such as imposing
more penalties and legal suits in order to prevent illegal harvesting, then undoubtedly, it will
tends to move cost of illegal harvesting upward as they will have to pay more penalties and fear
from the punishment. It will have an adverse impact over the abnormal economic profit of the
firm. However, legal firm’s operating cost will not be affected as they are already following
governmental legislative framework, environmental laws and compliance with forest laws.

(B) (i)
Greenpeace report suggests that Brazilian mahogany trade is dominated elite group and
two exporters, Moises Carvalho Pereira & Osmar Alves Ferreira as they jointly controlled ove
80% of the total export volume of mahogany. If it is true, then such market characteristics
represent oligopoly market structure wherein entire market is dominated & controlled by few
marketers (Yang, Ng and Ni, 2017). However, remaining big proportion of producers jointly
control a very less proportion of overall market. In this market, major producers set highly
concentrated prices for their offerings.
B. (ii)
Collusion is an illegal or conspiracy agreement wherein two or more competing rivalries
create agreement and contracts to avoid competing with each other and focus on mutual benefits.
In the field of economy, it often takes place in the oligopoly market structure and in the stated
case, Pereria and Ferreria decide to collude with each other to gain higher return which will have
an significant impact on the entire market (Chotekorakul and Nelson, 2017).
(i)
Collusive oligopoly

Diagram created above clearly indicates that both the firms collude with each other and
created a cartel for fixing price at the point which maximizes overall industry profit. In this both
mahogany kings set quota and price & output is just like that of monopoly market (Hashmi and
Biesebroeck, 2016). Total quantity QM will be available to the dominant companies who will
gain higher return due to price leadership.
(ii)
By collusion agreement, Pereria and Ferreria will restrict the supply of mahogany timber
resultant in short supply at high price and acts like monopoly.
(iii)
Collusion between the mahogany kings is not a sustainable long-run strategy because in
this, firms make secret illegal agreements and control market supply so as to raise prices in order
to maximize their return. It is an illegal activity as it leads to increase product prices
unnecessarily for the final consumers and leads to move towards monopoly market.

TASK C IMPACT ON THE HOMICIDE RATE
(A). Constructing a graph
Abaetetuba Bonito Curu Magalhes Barata Pacaj Santa Isabel do Par Soure
0
50
100
150
200
250
Homicide rate for the period pre - 1999
1998
1997
1996
1995
Abaetetuba Benevides Concrdia do Par Itupiranga Nova Timboteua Prainha Santo Antnio do Tau Trairo
0
20
40
60
80
100
120
140
160
Homicide rate for the period 1999-2001
1999 2000 2001

Abaetetuba Benevides Concrdia do Par Itupiranga Nova Timboteua Prainha Santo Antnio do Tau Trairo
0
100
200
300
400
500
600
700
800
900
1000
Homicide rate for the period 2001-2008
2001 2002 2003 2004 2005 2006 2007 2008
Abaetetuba Benevides Concrdia do Par Itupiranga Nova Timboteua Prainha Santo Antnio do Tau Trairo
0
100
200
300
400
500
600
Homicide rate for the period post-2008
2009 2010 2011 2012 2013

(B) Average homicide rate for para municipalities with and without mahogany for different
period
Period
Areas with
mahogany
Areas without
mahogany
Homicide rate difference
between municipalities
Pre-1999 pre major
governmental
intervention 11.90 6.32 5.58
1999 to 2001 85% license
of mahogany harvesting
revoked 19.85 5.19 14.67
2001 to 2008 Harvesting
banned 34.10 10.55 23.55
Post 2008 The law is
enforced 46.25 21.32 24.92
C. Results
From the above presented calculation and graph, it can be seen that before 1999 when
government did not intervene harvesting, average homicide rate for the areas with and without
mahogany is determined to 11.90 and 6.32 respectively. However, during 1999-2001, when 85%
license revoked, average homicide rate in mahogany areas goes up to 19.85. Afterwards, when
government banned its harvesting, then, the averages homicide rate shows sudden huge increase
to 34.10 which clearly reflects that making excessive cutting of mahogany as an illegal tends to
increase violence that cannot be resolved with the justice system. However, lastly, period after
2008, when strict laws introduced, homicide rates demonstrated further increase to 46.25. Thus,
the results cleared that strict government ban on mahogany harvesting leads to raise average
homicide rate (Mickiewicz and et.al, 2017).

TASK D LESSONS AND REFLECTIONS
A
As per Chimeli and Soares, it is stated that making mahogany harvesting as an illegal
activity leads to cause additional death of 5,171 people. According to the results drawn, it being
studied that putting taxation on the harvesting by Brazilian government will results in high prices
so as to reduce the quantity demand & supply. However, abolishing the undesirable economic
activity that is excessive mahogany harvesting tends to bring unintended consequences such as
promote illegal harvesting & high rate of homicide (Do, 2011). Therefore, it reflects that
government should make strategies for reduction in demand instead of supply by quota
restriction, taxation and making it as an illegal act.
B. (i)
According to the theory of self-interest, it is stated that in capitalist economy, self-interest
leads to foster social welfare (Rho and Tomz, 2017). However, in the given case, the concept
cannot work because unregulated mahogany harvesting can leads to market failure because
excessive cutting may leads to have adverse consequences i.e. deforestation and adverse impact
over survival of species. However, on the other hand, declaration of the cutting illegal can leads
to high rate of homicide. Therefore, it becomes essential to take other actions such as setting
quota and others so as to minimize excessive cutting.
B. (ii) 1.
Opportunity cost refers to the loss incurred by producers as a result of losing one
alternative when other is being selected. Although Brazil has perfect climate and natural
conditions for the production of mahogany, however, referring market based solution, if
mahogany is decided to produce in other nations then it will results in opportunity cost for the
producers. It is because, they will have to search place with perfect atmospheric condition,
climate and sandy loam soil which is well drained, in this regards; they will have to incur high
cost. Thus, the less cost of production at Brazil is the opportunity cost for the producers who
choose to produce mahogany in other country.
B. (ii) 2.
Government can put restrictions on the harvesting of mahogany so as to combat the
dangers of species extinction. Reduced impact logging (RIL) is a harvesting technique which

helps to reduce possible natural damage such as soil, water quality and other tree shocks and also
sustain production capacity and forest environmental function (Reduced Impact Logging in the
Amazon, n.d.). It is an intensively planned method of timber harvesting which minimizes its
negative impact on forest and environment. It involves various preventive measures such as pre-
harvest inventory, mapping cross trees, post harvesting assessment and many others. Besides
this, if we consider downward shift in demand and upward shift in supply curve, then the
problem of excessive cutting of mahogany can be easily reduced.
CONCLUSION
The above report concluded that Brazilian government’s ban on the harvesting of
mahogany rose average homicide rate in the country. Therefore, instead of putting strict
restriction, government must look after other ways to combat such concerns such as they must
focus on reduction in demand instead of supply. Reduced Impact Logging technique is being
suggested which will helps to reduce environmental damage due to excessive harvesting.

REFERENCES
Books and Journals
Canto, V.A., Joines, D.H. and Laffer, A.B., 2014. Foundations of supply-side economics: Theory
and evidence. Academic Press.
Case, K.E., Fair, R.C. and Oster, S., 2014. Principles of economics. Pearson Higher Ed.
Chotekorakul, W. and Nelson, J., 2017. To Collude or not to Collude: An Exploratory Study of
Retail Store Performance and Strategic Choices in Bangkok Clothing Clusters. In The
Customer is NOT Always Right? Marketing Orientationsin a Dynamic Business World.
14(2). pp. 125-128. Springer, Cham.
Do, W.B.E.T.T., 2011. Behavioral economics: Past, present, future. Advances in behavioral
economics. p.1.
Farboodi, M., Jarosch, G. and Shimer, R., 2017. The Emergence of Market Structure. National
Bureau of Economic Research.
Gaoue, O.G. and et.al., 2016. Optimal harvesting strategies for timber and non-timber forest
products in tropical ecosystems. Theoretical Ecology, 9(3), pp.287-297.
Grogan, J. and et.al., 2016. How sustainable is mahogany management?. ITTO Trop. For.
Updat, 25, pp.5-9.
Hashmi, A.R. and Biesebroeck, J.V., 2016. The relationship between market structure and
innovation in industry equilibrium: a case study of the global automobile
industry. Review of Economics and Statistics. 98(1). pp.192-208.
Mickiewicz, T. and et.al., 2017. Resource endowment and opportunity cost effects along the
stages of entrepreneurship. Small Business Economics. 48(4). pp.953-976.
Rho, S. and Tomz, M., 2017. Why Don't Trade Preferences Reflect Economic Self-
Interest?. International Organization. 71(S1). pp.S85-S108.

Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and
policies. McGraw-Hill.
Yang, L., Ng, C.T. and Ni, Y., 2017. Flexible capacity strategy in an asymmetric oligopoly
market with competition and demand uncertainty. Naval Research Logistics (NRL).
Online
Reduced Impact Logging in the Amazon, n.d. [Online]. Available through: <
http://globalforestatlas.yale.edu/amazon/forests-and-logging/reduced-impact-logging>.
[Accessed on 2nd September 2017].