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:

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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.

4IMPACT OF GOVERNMENT REGULATION
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.

10IMPACT OF GOVERNMENT REGULATION
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

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(Source: Author)
Fig-11: Trend Line of Panel Data Of Homicide Rate
b)
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

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Table 1: Comparison of average homicide rates, municipalities with and without
mahogany, different periods
c) From the above graphs and calculations, it can be said that the homicide rate is much
higher in the mahogany growing areas. Over time, the rate has increased. It also reflects
the existence of illegal trading and the impact of government intervention on it10. From
the above table, the pattern of the homicide rate can be explained. Prior to 1999, there
was no government intervention in the mahogany production and trading. Hence, the
homicide rate was quite low in both types of the region. During 1999 to 2001, when 85%
of the licenses were revoked, the homicide rate increased little in the mahogany growing
areas, while in areas without mahogany the rate was lower11.Since 2001, when the
harvesting was banned, the homicide rate in the mahogany growing areas increased
significantly, which indicates the presence of illegal trading. These traders faced a huge
loss and had no hope of recovering. Hence, the homicide rate increased12. The difference
between the homicide rates in these two types of region has increased considerably.
Finally, post 2008, when the law was enforced, the homicide rate in the mahogany
growing areas increased further. This indicates that the government intervention has
helped in reducing the illegal trading of mahogany in the municipalities of Brazil.
Task D: Lessons and Reflections
a) Brazilian mahogany forest is world famous natural resources that require to be
preserved than destruction. But falling prey of the human needs, greed and profit motive the
forest is harvested without any limit13.The first initiative that came from the govt. was to
impose tax on producers to create disincentive for them to supply. But what has been learned
that due to inelastic demand the quantity demanded did not fall as much the price of
mahogany timber rose which attracted the producers to operate in the shadow market or
illegal market to earn profit by meeting demands of consumers. Harvesting was still legal by
then. The next step govt. took was to revoke 85% of license that further increased the
intensity of illegal market operation and selling mahogany woods in disguise of other normal
10 Gandolfo, G., 2013. International trade theory and policy. Springer Science & Business Media.
forests. Tropical Forest Update, 22(1), pp.12-15.
11 Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and policies. McGraw-
Hill
12 Nicholson, W. and Snyder, C., 2014. Microeconomic theory.
13 Reboredo, F., 2013. Socio-economic, environmental, and governance impacts of illegal logging. Environment
Systems and Decisions, 33(2), pp.295-304

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timbers. Thus government regulation and control failed to meet the purpose behind such
intervention that was evident in the even increased activity.
b)-i) If random harvesting is not regulated then the incentivized producer will follow the
self interest and keeps on producing or supplying to quench own benefit and profit motives.
When self interest can’s take care of the social welfare as whole by leading the allocation
toward inefficiency, market failure appears in the context14.Production than the social
desirable level would create inefficient and adverse social impacts. The most dangerous
impact being the loss of ecological balance, species surviving in such forests and so on.
ii)
1. One of the market based solution to reduce mahogany harvest locally has been the
shifting growing of mahogany in other countries. If Brazil produces other goods in which it
has comparative advantage and exchanges for the mahogany harvests from other country then
it can avoid the present ecological issues15.Now if Brazil engages in the production of
mahogany then 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 inflict higher opportunity cost.
2. The contextual study already presented government regulation as one of the solution
to the issue and also the consequences have been studied. Another most important solution
can be creating social awareness that can reduce mot only the supply but also the demands
coming from range of consumers16. Social campaigns and awareness programs can take care
of the issue on a large scale. As this would act as greater factor to make shift in both supply
and demand.
14 Saunders, J. and Reeve, R., 2014. The EU timber regulation and CITES (No. Energy, Environment and
Resources PP EER no. 2014/08, p. 30p). Chatham House, London, UK.
15
Seydack, A.H., 2012. Regulation of timber yield sustainability for tropical and subtropical moist forests:
Ecosilvicultural paradigms and economic constraints. In Continuous Cover Forestry (pp. 129-165). Springer
Netherlands.
16 Rubinstein, A., 2012. Lecture notes in microeconomic theory: the economic agent. Princeton University Press.

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REFERENCE
Barbosa, L.C., 2015. Guardians of the Brazilian Amazon rainforest: Environmental
organizations and development. Routledge.
Canto, V.A., Joines, D.H. and Laffer, A.B., 2014. Foundations of supply-side economics:
Theory and evidence. Academic Press.
Copeland, B.R. and Taylor, M.S., 2013. Trade and the environment: Theory and evidence.
Princeton University Press.
Feenstra, R.C., 2015. Advanced international trade: theory and evidence. Princeton
university press.
Free, C.M., Landis, R.M., Grogan, J., Schulze, M.D., Lentini, M. and Dünisch, O., 2014.
Management implications of long-term tree 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.
Gandolfo, G., 2013. International trade theory and policy. Springer Science & Business
Media.
Grogan, J., Schulze, M., Lentini, M., Zweede, J., Landis, M. and Christopher, M., 2013.
Managing big-leaf mahogany in natural forests. Tropical Forest Update, 22(1), pp.12-15.
Hyman, D.N., 2014. Public finance: A contemporary application of theory to policy. Cengage
Learning.
Nicholson, W. and Snyder, C., 2014. Microeconomic theory.
Reboredo, F., 2013. Socio-economic, environmental, and governance impacts of illegal
logging. Environment Systems and Decisions, 33(2), pp.295-304.
Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and
policies. McGraw-Hill
Rubinstein, A., 2012. Lecture notes in microeconomic theory: the economic agent. Princeton
University Press.

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Saunders, J. and Reeve, R., 2014. The EU timber regulation and CITES (No. Energy,
Environment and Resources PP EER no. 2014/08, p. 30p). Chatham House, London, UK.
Seydack, A.H., 2012. Regulation of timber yield sustainability for tropical and subtropical
moist forests: Ecosilvicultural paradigms and economic constraints. In Continuous Cover
Forestry (pp. 129-165). Springer Netherlands.
Tacconi, L., 2012. Illegal logging: law enforcement, livelihoods and the timber trade.
Earthscan.
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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