Mahogany Trade: Economics and Sustainability

This assignment delves into the complex world of mahogany trade, analyzing market dynamics, price manipulation strategies, environmental consequences, and government intervention efforts. It examines the ethical dilemma of balancing economic profits with ecological sustainability, discussing the role of consumer demand, alternative wood sources, and the impact of illegal harvesting on violence and biodiversity.

ECONOMICS
Mahogany Timber
STUDENT ID:
[Pick the date]

ECONOMICS
PART A
a) Based on the given description, the Brazilian government has put a tax on the producers of
mahogany so that to ensure that there is reduction in the harvest. The requisite diagram is
indicated below.
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.
b) The impact of imposition of quota can be understood with the help of the following
diagram.

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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.
c) (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. The relevant diagram is shown below.

ECONOMICS
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. This is shown below.

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It is apparent that there is an increase in the equilibrium price while there is an overall
decrease in the quantity consumed.
(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.
This is indicated below.
Hence, from the above diagram, it is apparent that there would be an increase in the
equilibrium price (i.e. from P1 to P2) and a decrease in the equilibrium quantity (i.e. from Q1
to Q2).
d) 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. The advice given by the economist is indeed correct as apparent from the
diagram below.

ECONOMICS
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.
PART B
a)
(i) 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. The profit
maximising diagram for a firm is indicated below.

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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.
(ii) 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.

ECONOMICS
(iii) 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.
b) 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.
ii) 1) 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. The equilibrium diagram for this situation is indicated below.
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.
2) 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

ECONOMICS
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.
3) 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.
TASK C
a) The relevant graph is indicated below.
b) The requisite table is as shown below.
c) The graph tends to clearly highlight the increase in homicide due to the associated
violence linked with illegal mahogany harvesting which is apparent between 2001 and

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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.
TASK D
a) (i) 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.
(ii) 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.
b) (i) 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.
(ii) 1) 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.
2) 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.