did banning ddt devastate cotton farmers in the mid-1970s?

1

Did Banning DDT Devastate Cotton Farmers in the mid-1970s?

DDT kills Boll Weevils

September, 1962

EPA banned DDT beginning

in 1973

protects

& Bald Eagles

2

Market for Cotton, 72-74

QCotton

PCotton

S72

D72

P72

Q72

S74

Q74

P74

Banning DDT

causeda derease in

supply

3

Political Scientist Aaron Wildavsky argues:

71 72 73 74 750

1

2

3

4

5

6

7

Cotton Production, 71-75

Q (b

illio

ns o

f lbs

)

Q

DDT Ban

“cotton crash”

“Devastated” cotton farmers

71 72 73 74 750

1

2

3

4

5

6

7

0

0.1

0.2

0.3

0.4

0.5

0.6

Cotton Q and P, 71-75

Q (b

illio

ns o

f lbs

)

P ($

per

lb)Q

P

4

Cotton Price and Quantity

Cotton Harvest Cotton Price

Year (billions of lbs) ($ per lb)

1972

1974

Cotton Harvest Cotton Price

Year (billions of lbs) ($ per lb)

1972 6.58 0.27

1974 5.54 0.43Sources: National Cotton Council of America & US Dept. of

Agriculture

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Two Effects of DDT Ban on Farmers’ Income:

1. Income by Q

2. Income by P

Net Effect Depends on the Price Elasticity of Demand (ed )

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Price Elasticity of Demand, ed

ed measures the responsiveness of the quantity (of cotton) demanded to a change in cotton’s (own) price, ceteris paribus.

ed =

7

Computing ed using the “Arc Formula”

ed = _____________________=

Elasticity is dimensionless (units cancel out).

8

Quantity (billions of lbs

per year)

Price ($ / lb)

5.54

.27

.43

D

Originalpoint

Newpoint

∆P = .16

∆Q = −1.04

Pavg =.34

Qavg = 6.066.58

Calculating the ed of Cotton

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Calculating ed

Quantity (billions of lbs

per year)

Price ($ / lb)

5.54 6.58

.27

.43

D

= − 0.36 47 % in P

17 % in Q

ed =

=causes

Pavg =.34 ∆P = .16

∆Q = −1.04

Qavg = 6.06

=

10

Calculating ed

• Note that ed is always negative (or zero) because of the law of demand.

• However, when discussing the value of ed , economists almost always use the absolute value. Using | ed |, a larger value means greater elasticity.

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Definitions—Inelastic & Elastic

0 1∞

0 < | ed | < 1 | ed | > 1

perfectly inelastic| ed | = 0

perfectly elastic| ed | = ∞

elasticinelastic

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ed and Total Revenue (TR)

TR72=$0.27 per lb *6.58 bil. lbs= $1.78 billion = B + C

TR74 = $2.38 billion = A + B

A

B Cif | ed | < 1 then↑ P ↑ TR

Q74 Q725.54 6.58

P72=0.27

P74=0.43

D Quantity (billions of lbs

per year)

Price ($ / lb)

72

74

= $600 million= $0.60 billion∆TR = A − C

| ed | = .36 D is inelastic

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ed & Total Revenue

0 1∞

0 < | ed | < 1 | ed | > 1

elasticDemand is …

P causes… TR TR inelastic

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“The economics of coal revolved around two factors: most of the cost of production was wages for miners, and if the supply fell the price would shoot up because in an age before oil and electricity, there were no good substitutes. Profits were low in 1902 because of an over supply; therefore the owners welcomed a moderately long strike. They had huge stockpiles which grew in value daily. It was illegal for the owners to conspire to shut down production, but not so if the miners went on strike. The owners welcomed the strike, but they adamantly refused to recognize the union, for then it would control the coal industry.”

http://en.wikipedia.org/wiki/Coal_Strike_of_1902

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What is ed for Cigarettes?

• “Economic studies have suggested that a price increase of 10 percent reduces smoking about 4 percent”

• ed =%∆Qd

%∆Pcig

Hence, studies Demand for cig is inelastic

= −0.40=-4

10

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Premium Cig (PC) and Discount Cig (DC)

Analysts predicted 10% ↓ in Q of PC demanded.

Why | ed PC| = 0.60 > | ed

Cig| = 0.40?

−0.60= = =

In 1998, PPC ↑ from $2.45 to $2.90 per pack while the PDC = $1.50.

What is the analyst’s estimate of ed PC?

ed PC =

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Fetal Heart Rate and Uterine Contractions

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Determinants of Elasticity

2. Necessities versus LuxuriesDemand for necessities tend to be inelastic

Market for At-Need Epidural Blocks (EB) PEB

QEB

D Very Nearly

perfectly inelastic

Gardasil: vaccine (for pre-teen girls) against (HPV) virus that causes cervical cancer. The price charged by Merck & Co. is $360. (Wikipedia)

“Anti-Cancer Vaccine A Tough Sell To Parents”

National Public Radio, Thursday, September 18, 2008

“As of late 2007, just one in five American girls under the age of 18 had received shots for HPV.”

Reasons for Low %:

1) Parents doubt that their child is sexually active.

2) Mistrust of vaccines

3) Price…“cost is a major obstacle if the girl is not covered by insurance”

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Determinants Of Elasticity

| eGardasil | | eGardasil |

>Poor HHs Non-Poor HHs

3. Proportion of the Budget

Goods that are a small % of peoples’ budgets tend to have inelastic demands (e.g., salt)

4. Time Frame | eReal Skeletons | | eReal Skeletons |

Long-Run Short-Run

India banned skeleton exports in 85

>

Internal

External

250GB Hard Drives

Western Digital (WD) Seagate

“My Book” “FreeAgent”

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The Demand for WD Drives

WD’s External Drive

P

Q

$100

Q1

WD’s Internal Drive

P

Q

$75

Q1

D D

Nearly…Perfectly Elastic

Less than perfectly elastic

East Coast in Jan 05 Snow Storms Hit

e = = 0.62

INELASTIC

1-month snowfall a 113-year high

January 27, 2005

Boston Snowfall (inches)

Price of Salt in Boston($ / ton)

Quantity of Salt in US (millions

tons / year)

2004 39.4 32 162005 86.6 46 20

2/)PP()PP(

2/)QQ()QQ(

0405

0405

0405

0405

2/)2374()3247(2/)1620(

)1620(

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Elasticity of …

D05

P05

Q05Q04

$46

16

=S05

P04$32

S04

D04

QRS

PRSMarket for Road Salt, 2004-2005

Supply

20

($ per ton)

(millions tons / yr)

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Elasticity of Supply

P05

Q05Q04

$46

=S05

P04$32

S04

QRS

PRSMarket for Road Salt, 2004-2005

16 20 (millions tons / yr)

($ per ton)

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Income Elasticity of Demand, ey

• If ey > 0, then good is a normal good.

• If ey < 0, then good is an inferior good.

%∆D___________________

%∆Yey =

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Table 1. Income and Garbage, 1960-2000

Garbage CollectedMean Family

Income (lbs per capita ) (thousand of real $)

1960 1000 301970 1200 411980 1350 421990 1650 492000 1700 57

Sources: Environmental Protection Agency, Municipal Solid Waste in the United States,2007; www.demographia.com/db-lg-hhld.htm

↑ Income ↑ Garbage Collection?

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Garage Collected (lbs per capita)

Average Family Income (thousands of real $)

1960

2000

32

Income%)Collection Garbagefor Demand(%

Income Elasticity of

Demand for Garbage Collection

=

≈ ____________________

2/)3057(3057

2/)10001700(10001700

=

= 0.84


From Fullerton & Kinnaman (2000),

ey = 33.0Y%D%

Garbage removal is a normal good.

ey = 84.0Y%D%

Our estimate,


QGC (lbs per capita)

PGC

D2007

P2007

1800

S

%∆Y = -9%

Substituting,

33.09%

D%

Solving,

%3D%

Last Severe Recession (early 80s)

Predicted ∆ Demand if same ∆ Income Occurs Today using F&K’s ey

%3GC%

D2009

1800 of %3lbs54

lbs54

lbs54 thanless

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Cross-Price Elasticity of D, ex,z

ex,z measures ∆ demand for a good caused by a ∆ price of another good, ceteris paribus.

ex,z =%∆DX %∆PZ

eX,Z > 0 X & Z are substitutes (e.g., heroin and marijuana)eX,Z < 0 X & Z are complements (e.g, graves and caskets are complements

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Not Surprising…

In 1969, US Army launched “an all-out campaign” against marijuana suppliers in Vietnam.

DH PM

%∆DH %∆PM

Suppose eHeroin,Marijuana > 0

to an Economist

In 1972, thousands of US soldiers were using heroin daily.

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Market for HPV Vaccine, 2010

Source: National Health Interview Survey, 2010

A B

C

Sample of 14-17 year old girls

1872 2485 3074

Current Situation

If doctor recHPV Vaccine

If doctor rec HPV Vaccine

Price($ per vaccine)

Quantity

Zero price&

D

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Market for HPV Vaccine, 2010

Source: National Health Interview Survey, 2010

A B

C

Sample of 14-17 year old girls

1872 2485 3074

Current Situation

If doctor recHPV Vaccine

If doctor rec HPV Vaccine

Price($ per vaccine)

Quantity

Zero price&

did banning ddt devastate cotton farmers in the mid-1970s?

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