Current Events Exercise

Submitted by: Richard F. Bieker, Delaware State University

Table of Contents

    Book Titles

    Summary: Maryland to Curb Fertilizers That Harm Chesapeake

    Talking it over and thinking it through

    Thinking About the Future

    Digging Deeper

    Sources
 
 

Book Titles (for which this exercise is applicable)

Case and Fair, Principles of Economics: Ch 12: General Equilibrium and the Efficiency of Perfect Competition, Ch 16: Public Goods, Imperfect Information, and Social Choice.

Case and Fair, Principles of Microeconomics: : General Equilibrium and the Efficiency of Perfect Competition, Ch 16: Public Goods, Imperfect Information, and Social Choice.

O'Sullivan and Sheffrin, Economics Principles and Tools: Ch 6: Government Intervention in Markets, Ch 15: Environmental Problems and Public Policy.

O'Sullivan and Sheffrin, Microeconomics Principles and Tools: Ch 6: Government Intervention in Markets, Ch 15: Environmental Problems and Public Policy.
 
 

Maryland to Curb Fertilizers That Harm Chesapeake

Story--Dateline: The Washington Post, April 11, 1998, start page A01

The toxic marine microorganism pfiesteria first became a source of concern in the United States in 1993 after it was thought to have poisoned two scientists from North Carolina State University who were studying its properties. Since that time pfiesteria has been found in waters from the Chesapeake Bay to the Gulf of Mexico. This toxin first received widespread notice in Maryland in the summer of 1997 when a panel of scientists in the state concluded that it was responsible for killing more than 30,000 fish in tributaries of the Chesapeake Bay. Scientists have also linked pfiesteria to certain human health problems, including difficulties in learning and concentrating, headaches, breathing problems, and skin sores.

The exact causes of the occurrence of toxic pfiesteria is not completely understood by scientists. It appears to be associated with the simultaneous occurrence of warm water temperatures, large amounts of nutrient runoff from farmland and the presence of the menhaden fish.

Environmentalists in Maryland have suggested a link between pfiesteria and the runoff of chicken manure used as fertilizer on farms on Maryland's Eastern Shore, a major poultry producing region. In 1998, Maryland Governor Parris Glendening proposed, and the General Assembly approved, a set of regulations to control the nutrient runoff from farmland. The regulations require farmers to test their soil and limit their use of fertilizer, including chicken manure. If they don't comply with the regulations, farmers face fines of up to $2,000 per year.

During the debate of the regulations, poultry producers argued against them. They argued that the link between nutrient runoff from farmland which has been fertilized with chicken manure and the occurrence of pfiesteria hasn't been clearly established, and that in fact a certain amount of nutrient runoff is necessary for Marine life. They also argued that the regulations will increase their cost of production. In comparison to Maryland, the neighboring state of Virginia has not implemented new regulations to deal with the pfiesteria problem, relying instead on voluntary cooperation by farmers and poultry processors.
 
 

Talking it over and thinking it through

Let's take a look at the pfiesteria issue.

1. Assuming that the nutrient runoff from poultry manure is in fact the cause of the pfiesteria problem, do spillover costs or spillover benefits occur? Explain.

 

 

Answer: Spillover costs occur because some of the costs of producing the poultry products are borne by individuals who are not involved in the production or consumption of these products. For example, commercial fishermen incur costs if the fish population is decimated and the fishermen's income from fishing declines. Fishermen may also incur increased health care costs and loss of income if the pfiesteria has an adverse effect on their health. In addition, individuals who use the Chesapeake Bay waters for recreation and come in contact with the pfiesteria may incur increased health care costs and suffer a loss in income.
 

2. Assume that the poultry industry is perfectly competitive and that the nutrient runoff from poultry manure is in fact the cause of the pfiesteria problem. Will the market equilibrium for poultry products be an efficient equilibrium? Illustrate using a supply and demand graph.

 

 

Answer: An efficient equilibrium occurs at the point where the benefits to society of consuming the good are equal to the costs to society of producing the good. If there are no spillover costs or spillover benefits, the demand schedule for poultry products measures the total benefits to society of consuming the products and the supply schedule measures the total costs to society of producing poultry products. Equilibrium occurs where quantity demanded equals quantity supplied or where the benefits to society of consuming the poultry products equal the costs to society of producing the poultry products. This results in the most efficient allocation of resources.

If the pfiesteria problem is caused by the runoff from poultry manure, there are spillover costs. That is, the poultry producers are imposing costs on parties not directly involved in the production or consumption of poultry products. If there are spillover costs, the supply schedule for the poultry industry does not take into account all of the costs of producing the product. If all of the costs, including spillover costs, are taken into account, the supply schedule would lie to the left of the supply schedule which includes only the costs borne by firms in the poultry industry. Combining the new supply schedule which includes all costs, including spillover costs, with the original demand schedule results in a lower equilibrium quantity and a higher equilibrium price than occurred when the supply schedule did not include spillover costs. From this we can conclude that if there are spillover costs associated with poultry production, the equilibrium output in the poultry industry is greater than the efficient output.
 

3. While the Maryland regulations were being debated, poultry producers argued that the regulations which limited the use of fertilizers, including chicken manure, would increase their costs of production. Explain how such regulations could increase production costs for poultry producers. Graphically illustrate the effect of the increased production costs on the supply schedule of poultry producers.

Answer: Since farmers will now have to limit the amount of poultry manure they spread on their fields, the poultry producers will have to incur costs in transporting the manure to areas where nutrient runoff is not a problem. In addition, use of less fertilizer could reduce crop yield and therefore increase the cost of the feed stock for the poultry industry.

If the cost of production for poultry producers increases, their supply schedule will shift to the left. Other things being equal, this will result in a lower equilibrium quantity and a higher equilibrium price for poultry products.
 

4. Assume that the poultry industry is perfectly competitive. If other poultry producing states do not implement regulations similar to those of Maryland, will poultry producers in Maryland continue their operations in the long run? Explain.

 

 

Answer: All firms in a perfectly competitive industry receive the same price for their product. In the long run perfectly competitive firms produce at the point where price equals minimum average total cost. If, because of the regulations, the poultry producers in Maryland have higher average costs than the prevailing average cost in the industry, they would incur losses and would not continue to operate in the long run.
 

5. What other approach might the State of Maryland use to deal with the spillovers of the poultry producers?
Answer: The State of Maryland could impose a per unit tax on the poultry producers. The amount of this tax would be equal to the amount of spillover costs per unit of poultry product. The effect of this tax would be to shift the firm's supply schedule to the left. The ideal amount of the tax would be the amount that results in a new equilibrium quantity where the total benefits of consuming the good equal the total costs of producing the good.

The State of Maryland's decision to impose regulations to limit the amount of nutrient runoff was in response to the pfiesteria problem in particular and a concern about the quality of the environment in general. However, it will be some time before the full impact of these regulations on the environment and the economy of the Eastern Shore of Maryland will be fully known. As these regulations begin to take effect on the environment and the economy, a number of interesting questions merit consideration. Will the regulations significantly improve the water quality in the Chesapeake Bay and its tributaries? From society's standpoint, how do the marginal costs of the regulations compare to the marginal benefits? Given environmental and economic goals, will the regulations prove to have been too stringent or not stringent enough? Exactly how will the regulations affect the costs of the poultry industry on the Eastern Shore? How will the industry respond? Will the industry migrate to other areas of the country? Or will there by innovation in the technology of poultry waste disposal to reduce production costs? To get complete answers to these questions we'll have to watch this "experiment" as it unfolds over the years.
 
 

Is it possible for poultry producers in Maryland to offset the cost increasing effect of the new regulations by developing and implementing a new technology to handle poultry waste? Or, is it economically viable for poultry producers in Maryland to convert poultry waste into a byproduct with market value?.

An article by The Maryland Cooperative Extension Service entitled "Making the Most of Manure" (http://www.agnr.umd.edu/users/agron/nutrient/Factshee/Manure/mostman.html) indicates that, by viewing manure as a valuable nutrient source rather than a disposal problem, producers can save thousands of dollars each year in fertilizer costs. The article also discusses ways to dispose of manure in a manner so as to reduce surface and water pollution.

Rich Smith, an Agricultural Engineer with the Regional Advisory Services of the Canadian Department of Agriculture in his article "Poultry Manure Handling - A Practical Approach" (http://www.agric.gov.ab.ca/livestock/poultry/ppw04.html#intro) examines the concept of considering animal waste as a resource rather than a waste. He discusses the prospects of the composting and selling of manure as a resource and finding customers who wish to purchase it.
 
 

Sources

Babington, Charles. (1998, December 9). Bay Governors Differ on Waste Limits. The Washington Post. A11.

Brown, David. (1998, August 14). Pfiesteria Linked to Thinking Problems: Conditions Caused by Microorganism, Study Concludes. The Washington Post. B01.

Goodman, Peter S. (1998, February 11, 1998). Perdue Enters Public Debate Over Pfiesteria; Poultry Industrialist Worries About Cost of Fertilizer Plan. The Washington Post. B04.

Goodman, Peter S. (1998, April 11). Md. To Curb Fertilizers That Harm Chesapeake. A01.

Juday, Dave. (1998, June 29). Pfiesteria Hysteria. The Washington Times. A17.

Kaiser, Jocelyn. (1997, April 11). New Clues for Two Toxicological Mysteries. 276, Science. 201.

Phillips, Angus. (1998, July 21). Keeping Tabs on the Cell from Hell. The Washington Post. E02.

Senate Proposal Would Fight Pfiesteria. (1998, June 30). The Washington Post. D03.