Government Intervention and its Economic Impact on Mahogany Harvesting

This report examines the economic and social impacts of government regulations on the mahogany harvesting industry in Brazil. It analyzes the welfare effects of interventions such as taxation and quotas, exploring how these policies affect supply, demand, and market equilibrium. The report further investigates production decisions under different market structures, including competitive, monopoly, and illegal market scenarios, and assesses the role of collusion. A significant portion of the report focuses on the correlation between government interventions, specifically those aimed at controlling mahogany harvesting, and the homicide rate in municipalities. The analysis uses statistical data to demonstrate the effects of license revocation, harvesting bans, and law enforcement on both the mahogany trade and related violence. Finally, the report offers lessons and reflections on the effectiveness of different regulatory approaches, suggesting market-based solutions like international trade and social awareness campaigns to mitigate the negative consequences of unsustainable harvesting practices and illegal activities. The report concludes with a comprehensive reference list of relevant sources.

Running head: IMPACT OF GOVERNMENT REGULATION
IMPACT OF GOVERNMENT REGULATION
Name of Student:
Name of University:
Author Note:

1IMPACT OF GOVERNMENT REGULATION
CONTENTS
Task A: Welfare Effects of Government Intervention..............................................................2
Task B: Production Decisions...................................................................................................7
Task C: Impact on the Homicide Rate....................................................................................11
Task D: Lessons and Reflections............................................................................................13
REFERENCE...........................................................................................................................15

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Task A: Welfare Effects of Government Intervention
a) Imposition of tax takes place by the government when it intends to curb demand or
supply by procuring more money from either consumer or producer or both. In this
context govt. wants to decrease the mahogany harvesting y taxing the producers or
suppliers of such goods. Incidence of tax on producer shifts the supply curve upward or to
left (to S1) increasing equilibrium price (to P1) and decreasing equilibrium quantity (to Q1)
in the mahogany harvesting market compared to the without tax scenario1.Tax reduces the
mutual exchange between buyers and suppliers that further leads to forgone producer as
well as consumer surplus dropping the social welfare down and generating deadweight
loss by the area of triangle E1AE0.
Fig-1: imposition of Tax in Mahogany Harvesting Market
b) Limiting the harvesting of mahogany by imposing quota on the amount harvested
(suppose at Q1) through government intervention, the supply curve becomes vertical at Q1
as the producer can’t supply more than the amount whatever be the price. Compared to
equilibrium E0 scenario, now the equilibrium price level reached at P1 which is pretty
higher than before quota. The deadweight loss is being shown by the area of triangle ABC
1 Barbosa, L.C., 2015. Guardians of the Brazilian Amazon rainforest: Environmental organizations and
development. Routledge.

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Fig-2: imposition of Quota in Mahogany Harvesting Market
c)
i) Due to fear of punishment the producer will reduce its supply shifting the supply
curve toward left to S1. Since the mahogany products are undesirable to consumers they
cut back the demand too. The fall is demand not due to changes in price but due to
changes in the taste and preference by them. As a result demand falls2. Now what happens
to equilibrium price and quantity depends on the amount o which demand falls. If demand
falls by the same amount of fall in supply the price remains same though equilibrium
quantity falls. If demand falls less than the supply falls then price drives up to P1 and
quantity is also at low than Q0. If demand falls more than the fall in supply then the
equilibrium price and quantity fall to P3 and Q3.
2 Copeland, B.R. and Taylor, M.S., 2013. Trade and the environment: Theory and evidence. Princeton
University Press.

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Fig-3: Mahogany Harvesting Market
ii) Due to disincentive to produce caused by punishment fear, the producers drops
harvest which shifts supply curve to S1. Taste and preference for mahogany harvest has
increased by the consumers as a result demand shifts outward. What happens to equilibrium
price and quantity is determined by the quantum of shift in the demand curve3. Post shift
equilibrium price will be higher in any cases but quantity supplied can fall, rise or stay
constant at Q0 4.If demand rise more than fall in the supply then quantity rises and falls when
the rise in demand is less than the fall in supply which is presented in fig-4.
3 Tacconi, L., 2012. Illegal logging: law enforcement, livelihoods and the timber trade. Earthscan.
4 Free, C.M., Landis, R.M., Grogan, J., Schulze, M.D., Lentini, M. and Dünisch, O., 2014. Management
implications of long-term tree

5IMPACT OF GOVERNMENT REGULATION
Fig-4: Mahogany Harvesting Market

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iii) Due to enforced law and monitoring against illegal harvesting, the producers drops
harvest which shifts supply curve to S1. No change in the desirability leads to no shift in
demand and it remains constant at previous level. As a result equilibrium quantity falls to Q1
and price rises to P1.
Fig-5: Mahogany Harvesting Market
d) Imposition of tax leads to higher price of the harvest in the market that affects
both the supplier and consumer depending on the elasticity of their supply and
demand. Coming to demand, if the mahogany harvest faces an inelastic demand in the
market the even though tax is imposed, the higher price can’t successfully curb the
equilibrium quantity in the market because for 1 unit increase in the price the demand
will for less than 1 unit5.According to the economist if consumers somehow can be
manipulated to demand less then both the equilibrium quantity and price of mahogany
harvest in the market will drop down that would further meet the government motive
quite easily.
5 Zimmerman, B.L. and Kormos, C.F., 2012. Prospects for sustainable logging in tropical forests. BioScience,
62(5), pp.479-487.

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Fig-6: Mahogany Harvesting Market
Task B: Production Decisions
a)
i) The profit maximizing production decision regarding the mahogany harvest depends
on what kind of market it is operating in. Almost for all kind of market structure, producer
chooses to produce till the level of output where the profit it derives becomes maximum6.For
competitive market the production takes place P=MC=MR. 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.
6 Canto, V.A., Joines, D.H. and Laffer, A.B., 2014. Foundations of supply-side economics: Theory and
evidence. Academic Press

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Fig-7: Profit Maximized Production in Mahogany Harvesting Market(Legal)
ii) Pre 1999, the market for mahogany was legal but post that year, the harvesting and
marketing of that became illegal. Still the market operation buying and selling them were
active. These methods were able to avoid imposed 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 where MC=MR7. Due to
operating outside of the market and govt. regulation, the ATC as well as MC of the firm
reduces that incentivizes the producer to supply more as a result illegal market supply rises to
QB with fall in the highest level of price being charged.
7 Grogan, J., Schulze, M., Lentini, M., Zweede, J., Landis, M. and Christopher, M., 2013. Managing big-leaf
mahogany in natural

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Fig-8: Profit Maximized Production in Mahogany Harvesting Market (Illegal)
iii) If illegal market now falls under government monitoring subject to strictly enforced
laws then the producer won’t be able to supply at previous cost. Either the cost level would
go higher creating disincentive to supply or the production would be restricted by the govt.
itself8. In such case the operating cost difference in the legal and illegal market would vanish
and both the market would face same kind of restrictions and conditions imposed with
regards to supply.
b)-i) Since a small elite group controls the market of mahogany locally it appears that the
market structure is oligopolistic in nature where few seller are existent in the market. On the
other hand export market is largely taken care of by two powerful players that indicate
presence of duopoly market structure.
ii)-1) Since these two are only producers in the market, instead of supplying separately they
enter into a collusion that help them set price and quantity set at level higher than the market
equilibrium level. This increases the industry profit and pushes to maximized level. Without
collusion firms had to share different level or profits with higher share of profit snatched by
the leader compared to the follower in the duopolistic market9.But collusion helps them share
the profit equally and higher profit stems from higher market price than equilibrium while
quantity supplied might be lower than equilibrium amount.
2) Duopolists collude in order to lower the market supply and increase the price level
unnecessarily high so that they can derive chunk of the profit. This implies lower
deforestation which is beneficial for the health of mahogany population.
3) Yes the collusion strategy if maintained for long time can lead to much lowered
deforestation of mahogany trees. Since the colluders charge much higher price for low level
of quantity supplied, the pressure on supply falls and overtime higher prices of harvest would
8 Feenstra, R.C., 2015. Advanced international trade: theory and evidence. Princeton university press.
growth and mortality rates: A modeling study of big-leaf mahogany (Swietenia macrophylla) in the Brazilian
Amazon. Forest ecology and management, 330, pp.46-54.
9 Hyman, D.N., 2014. Public finance: A contemporary application of theory to policy. Cengage Learning.

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create disincentives for the consumers. As a result in the long run the harvest would fall and
that would be sustainable to the Brazilian ecology maintaining the balance.

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Task C: Impact on the Homicide Rate
Fig- 9: Homicide rate for all Para Municipalities for the year 1995 – 2013
(Source: Author)
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
Fig- 10: Average Homicide rate for all Para Municipalities for the year 1995 – 2013