Impact of Market Demands on Illegal Logging

This assignment delves into the complex relationship between market demands and illegal logging. It examines how the pressure for timber products fuels unsustainable harvesting practices. The analysis considers the interplay of supply and demand forces, the influence of social campaigns and awareness programs on consumer behavior, and the role of policy interventions in regulating the timber trade. The goal is to understand the driving factors behind illegal logging and explore potential solutions to mitigate its negative consequences.

Running head: ABOLITION OF MAHOGANY HARVESTING, INCENTIVES AND
HOMICIDE
LINK BETWEEN ECONOMIC ACTIVITY AND VIOLENCE IN BRAZIL
Name of Student:
Name of University:
Authors note:

1EFFECT OF REGULATION ON MAHOGANY HARVEST IN BRAZIL
TABLE OF CONTENT
Task A: Welfare Effects of Government Intervention..............................................................2
Task B: Production Decisions...................................................................................................6
Task C: Impact on the Homicide Rate....................................................................................10
Task D: Lessons and Reflections............................................................................................13
REFERENCE...........................................................................................................................16

2EFFECT OF REGULATION ON MAHOGANY HARVEST IN BRAZIL
Task A: Welfare Effects of Government Intervention
a) Various policies are adopted by government in order to stabilize economy and one
such policy is tax imposition, as a result of imposition of tax, buyers or sellers mainly
faces constraint in terms of price differentiation. Tax imposition also creates more
revenue to government funding (Pollack, 2012). The increasing harvest of mahogany in
Brazil draw the attention of government and as a result government decided to reduce the
harvesting by making the goods costlier through imposition tax payment for each unit of
production.
Figure 1: Tax Regulation imposed in Mahogany Market
Tax imposition on seller leads to movement of supply curve upward direction and for
this reason supply decreased in the market to avoid the tax payment. The reduction in supply
with same demand demanded leads to higher market price after tax implementation and the
equilibrium quantity supplied in the market falls from Q0 to Q1. Tax thus reduces the amount
exchanged between buyers and suppliers and this in turn leads to loss of both the producer as
well as consumer surplus. This result creates forgone social welfare and generates
deadweight loss which is shown by the area E1AE0 in the above diagram.

3EFFECT OF REGULATION ON MAHOGANY HARVEST IN BRAZIL
b) Quota is a regulatory policy implemented by the government to impose restriction on
the quantity supplied in the market. It sets limit on production and supply in the market
(Pothen and Fink, 2015.). Government imposed quota on maximum harvest amount of
mahogany in order to tackle problem associated with it. This step resulted in vertical
supply curve vertical with quantity level to Q1 beyond this quantity level the supplier
cannot supply .The vertical supply curve resulted in movement of equilibrium price at P1
which is higher than the previous equilibrium price E0 . The area of ABC in the below
figure shows deadweight loss that creates leakage of social welfare.
Figure 2: Quota in Mahogany Harvesting Market
c)
i) The rigorous action taken against sellers can create disincentive to suppliers
and this is evident from the above diagram which shows supply curve moves towards left
to S1. The decrease in demand of mahogany woods and related products to consumers fall
in demand that in turn causes downward shift of the demand curve. The fall in demand
thus shows change in taste and preference of the consumer. Equilibrium price and
quantity as a result of imposition of tax and quota changed and for this demand and
supply also changed

4EFFECT OF REGULATION ON MAHOGANY HARVEST IN BRAZIL
Figure 3: Fall in DD & SS in Mahogany Market
Fall of demand by the same amount of fall in supply keeps the price unchanged
though equilibrium quantity falls. Demand fall that is less than the fall in supply drives price
up to P1 and equilibrium quantity is lowered. Demand fall more than the fall in supply puts
down the equilibrium price and quantity to P3 and Q3.
ii) The fear of punishment and strict action undertaken against harvesting of mahogany
leads to fall in incentive to produce which is shown by the shift of supply curve to
S1(Benkovskis and Worz, 2014).The desirability of the mahogany harvest increases which in
turn increases taste and preferences shifting the demand curve upward. The degree of shift in
the demand curve determines the equilibrium price and quantity in market. Post shift
equilibrium price will be higher for all the cases but quantity supplied can fall, rise or stay
constant at Q0. If demand rises more than fall in supply then quantity rises and it falls when
the increase in demand is less than the fall in supply.

5EFFECT OF REGULATION ON MAHOGANY HARVEST IN BRAZIL
Figure 4: Change of Taste & Preference
iii) The next step taken by governing authorities toward intention of reducing the
mahogany harvest is to enforce law and application strict monitoring against illegal
harvesting. These lead to fall in harvest made by the producer which shifts supply curve to S1.
But due to absence of change in the desirability no shift in demand takes place and further
remains constant at previous level. This leads to fall in equilibrium quantity to Q1 and price
rises to P1.
Figure 5: Impact of Monitoring in Mahogany Harvest Market

6EFFECT OF REGULATION ON MAHOGANY HARVEST IN BRAZIL
d) Tax imposition affects the buyer or seller and the degree of affect depends on the
incidence of tax on them. The burden of tax is determined by the elasticity of demand and
supply faced by each supplier. The inelastic demand for mahogany harvests proved to be
unsuccessful to reduce the quantity demanded even though tax imposition leads to higher
price of the good (Cleaver, 2013). Inelasticity of demand reflects fall of demand by less than
one unit for unit rise in price level. The economist focused on less demand generated in the
market as a policy to control the entire market activity of mahogany harvests.
Figure 6: Reducing Consumption of Mahogany Harvest
Lower demand along with the same level of supply will cause lower equilibrium price
as well as quantity (shown by P1 and Q1). Lower price will cause the producer to drop the
harvest and the purpose borne by the government in order to regulate the harvests would be
achieved.

7EFFECT OF REGULATION ON MAHOGANY HARVEST IN BRAZIL
Task B: Production Decisions
a)
i) Market structure determines the conditions of profit maximizing production decision
of the producers. Irrespective of the market structure the producers operate till the point
where it manages to maintain higher profit from the production process.
In case of monopoly and monopolistic market the producer produce where marginal
revenue gets equal to marginal cost and price is always higher than MR. If we consider
mahogany market is monopoly or oligopoly with presence of few sellers then seller
maximizes profit at the point of production where MC=MR with falling ATC.
Figure 7: Profit Maximized Production in Mahogany Market
ii) Before the year 1999, the market operation of mahogany timbers was legal and free of
issues. Post this year government took control of the market regulation that focused on

8EFFECT OF REGULATION ON MAHOGANY HARVEST IN BRAZIL
mahogany harvests. Inspite of various regulations, the demand and supply of the timber were
intact creating room for illegal market or shadow market. This was profitable option for
producers since they could avoid tax, lower production cost and drive up the selling price
than market price all of which lead to profitable supply. Considering the supplier to be a
monopolist, the short run production decision would be at MC=MR. Since the operation takes
place outside of the market and lack of govt. supervision, the average total cost falls leading
to lower marginal cost of the firm. This provoked the producer to supply more leading to hike
in illegal market supply to QB with fall in the maximum price being charged.
Figure 8: Profit Maximized Production in Shadow Market of Mahogany
iii) Stringent supervision and monitoring by government in terms of enforced laws leads
to restricted supply made by the seller. Suppliers have to pay tax or follow quota or even stop
production all of which are demotivating for him as a producer. Supplying at previous cost is
not permissible now and as a result cost can go up discarding producer’s incentive to supply.
The differentiation in operating cost in the legal and illegal market will drive down to zero if
government regulates the black market activities.

9EFFECT OF REGULATION ON MAHOGANY HARVEST IN BRAZIL
b)
i) The mahogany timber market is controlled by a small group of people and this implies
there are few sellers inthe market. This reflects oligopolistic market structure operation. The
export of the good is conducted mostly by two powerful players representing presence of
duopoly market structure.
ii)
1) There are two producers present in duopoly market and presence of price war is often
common when they make supply decision and strategy separately. To avoid the loss of profit
by biased distribution of goods, they enter into a collusion or cartel that help them set to price
and quantity at a level higher than the market equilibrium level(Dunne, 2013). As a result
industry profits also increases and reaches maximum level. Without collusion firms had to
share different level of profits with higher share of profit snatched by the price leader
compared to the follower in the duopolistic market. Cartel helps them to share profit equally
by generating higher profit from market by driving up the market price while lowering
quantity supplied.
2) The collusion signed by the duopolist leads to high market price and low supply as a
result price increases. Higher price creates disincentive in the demand made for them. Low
supply indicates lower rate of deforestation that shows good health of the mahogany forests.
3) In the collusion strategy, resulting low level of supply is the decision made by the
producers only. This is done to set the market price at much higher level than the equilibrium
level (Feng,2012). The result can be fall in demand that matches with the low level of supply
and overtime higher prices of harvest would create disincentives for the consumers. As a

10EFFECT OF REGULATION ON MAHOGANY HARVEST IN BRAZIL
result in the long run the harvest would fall and that would be sustainable to the Brazilian
ecology maintaining the balance of ecology with reduced deforestation.
Task C: Impact on the Homicide Rate
a)
Graph 1: Homicide rate for all Para Municipalities for the year 1995 – 2013

11EFFECT OF REGULATION ON MAHOGANY HARVEST IN BRAZIL
b)
Abaetetuba Capanema Juruti Portel S o Jo o de Pirabas� �
0
10
20
30
40
50
60
70
80
90
Average of Homicide rate in 128 Para
municipalities (1995-2013)
Total
Figure 9;Average Homicide rate for all Para Municipalities for the year 1995 – 2013
(Source: Author)
Period
(1)
Areas with
mahogany
(2)
Areas without
mahogany
(3)
Homicide rate
difference
between
municipalities
(4)
Pre-1999.
Pre major
government
intervention
12.41835 6.154223 6.264131
1999 to 2001.
85% of licenses
revoked
19.43157 5.009476 14.4221
2001-2008.
Harvesting
banned
34.16096
10.02253 24.13843
Post-2008.
The law is
enforced
44.84869 21.26008 23.58861
Table 1: Comparison of average homicide rates, municipalities with and without
mahogany, different periods

12EFFECT OF REGULATION ON MAHOGANY HARVEST IN BRAZIL
c) The graphical representation based on the panel data of 128 municipalities of Brazil
over the period of 1995-2013, depicts the higher rate of homicide rate in areas prone to
mahogany growth. The trend and pattern implies the overtime increase in the rate. The impact
of government intervention and illegal trading exist ( Del Guercio,2013). Prior to 1999, there
was absence government intervention in the mahogany production and trading hence no
problem of the homicide rate existed in both regions. During 1999 to 2001, govt. revoked
85% of license regulating the production which pushed the homicide little high in the
mahogany growing areas. The rate was low at areas without mahogany. Since 2001, the
harvesting was banned strictly and this had greater impact on homicide rate which increased
significantly in the mahogany growing areas. This led to presence and increase in illegal
transactions (Hyman,2014).
From the study it is evident that the difference between the homicide rates in these
two types of region has increased considerably. Post 2008 law enforcements led to high level
of homicide rate in the mahogany growing areas. Though unfortunate for the suppliers and
traders, the statistics conclude that the government intervention has been able to reduce but
not totally abolished illegal trading of mahogany in the municipalities of Brazil.

13EFFECT OF REGULATION ON MAHOGANY HARVEST IN BRAZIL
Task D: Lessons and Reflections
a) Mahogany forest is one of the significant factor of Brazilian economy. This precious
natural resource of the country should be well preserved and not destroyed (Gandolfo 2013).
But with urbanization, pressure of population and increasing human need and demand in
terms of consumption, yielding profit large scale harvest of mahogany continued.
Government intervened to tackle the growing issue in form of tax imposition initially with the
motive of curbing demand and supply. But this could not stand out well in front of the rising
and inelastic demand that the market of mahogany timbers faces (Nicholson and Snyder
2014). The regulation in the market and consequent higher price led to operation of shadow
market or illegal market to earn profit by meeting demands of consumers. Mahogany harvest
was not even illegal initially. The next step of the govt. was to revoke 85% of license. This
intensified illegal market operation and selling and exporting of the mahogany woods in
disguise of other normal timbers increased as per the export data. Thus government
regulation and control failed to meet the purpose behind such intervention that intensified
black market trading even though the intervention seem doing well on the surface analysis.
b)
i) Market failure is an obvious consequence of adverse self-interest impacting in social
welfare motives. Individuals are driven by self-interest. But when self-interest of one creates
external impact on other social agents that leads to larger social marginal cost exceeding
social marginal benefit ( Boutelle, 2014),This also indicates inefficient allocation of resources
that results in low production of social welfare. Unregulated harvest would induce the
producers keep on harvesting randomly to meet their self-interest of profit out of the supply
in market (Knight, 2012. ). Production above the social desirable level would create inefficient

14EFFECT OF REGULATION ON MAHOGANY HARVEST IN BRAZIL
and adverse social impacts. The most hazardous impact is ecological misbalance and threat of
existence of the species surviving in such forests.
ii)
1. Apart from government regulation on the local producers and traders, another market
based solution can be, shifting the location of mahogany production and harvests in other
countries in order to nullify the existent ecological issue growing around random
deforestation (Negreros-Castillo and Mize, 2013). Brazil enjoys geographical advantage of
possessing such rich natural resource. Now if Brazil stops this production and prefers
importing the good from other regions then it has to provide some other good to those regions
in exchange. The exchanged good would be in line of the production in which the country
enjoys comparative advantage which helps it impose lower opportunity cost engaged in
production (Free et al. 2014). After shifting the location of growing mahogany if Brazil is to
produce mahogany timbers then that would raise the opportunity cost because it would have
to produce something in which it does not have advantage and cutting back the production
having comparative advantage (Copeland and Taylor 2013). This trade off falls thus
adversely affects economic performance of the country. For one unit production of mahogany
harvests, it has to let go some unit of the production of the goods which it was producing
comparatively advantageously. Thus growing mahogany now would impose higher
opportunity cost.
2. The background of the analysis presents how government regulation was imposed as
one of the solution to the issue revolving around random harvesting of mahogany. The
consequences that have been identified are interesting with leading rise in the illegal market
and trading activities (Joossens and Raw, 2012). The export trend shows growing trend the

15EFFECT OF REGULATION ON MAHOGANY HARVEST IN BRAZIL
more government shifts to stricter regulations leading to lesser concrete impact of the
government motive. In such scenario, another most important solution can be generating and
boosting social awareness that can effectively reduce both the supply and the demands
operating in the market (Ruttan and Thirtle, 2014). Social campaigns and awareness programs
have large impact on this issue since this would act as an important element to make shift in
both supply and demand decision from the core

16EFFECT OF REGULATION ON MAHOGANY HARVEST IN BRAZIL
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