The Role of Economics in Achieving Welfare Gains for Animals 9CHAPTER
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The Role of Economics in Achieving Welfare Gains for Animals 9CHAPTER Jennifer Fearing and Gaverick Matheny Introduction he demand for animal prod- schools of economic study, macro- product market. In the factor mar- ucts and services is a power- economics and microeconomics. ket, households (or firms) that Tful economic force in society, Most often references to “the own the factors of production sell and multibillion-dollar industries economy” are related to macroeco- their labor, land, and capital to are organized around this demand. nomic concerns: interest rates, firms that produce products in These industries often face in- employment figures, trade bal- exchange for wages, rent, and creased costs by improving animal ances, inflation levels, commodi- interest. In the factor market, welfare and are quick to use eco- ties prices, and other aggregate households are the sellers, and the nomic arguments against proposed measures of market behavior. companies are the buyers. welfare reforms (see sidebar on Macroeconomic figures are helpful In the product market, compa- page 169). These arguments, while for making broad comparisons nies sell the products they have often specious, can influence con- between today’s “economy” and produced to households that pay sumers, voters, and policy makers. that of earlier periods or the money to purchase them. The Citizens are less likely to support economies of other countries/ money flows in the opposite direc- animal welfare reforms they’ve been regions/states. Those who study tion this time: people buy products told will double their shopping bill microeconomics focus on the from firms that produce them. In or impoverish family farmers. behavior of, and interactions this way, money flows circularly— Animal welfare advocates cannot among, individual consumers, pro- creating an economic marketplace respond to these economic argu- ducers, and industries. where money goes from the produc- ments with moral rhetoric alone. Changes in the welfare of ani- ers to the workers in the form of Instead, non-governmental ob- mals—whether the animals are the wages and back to the producers in servers (NGOs) must challenge the products themselves (e.g., meat, the form of payment for products. economic assumptions, calcula- hunting trophies, fur coats) or Consider the market for eggs. In tions, and conclusions of animal in- whether animals are used in the factor market, an egg farmer dustries and produce reliable eco- process or production (e.g., eggs, needs factors of production, in- nomic arguments of their own. To dairy products, cosmetics testing, cluding land on which to build do so they should understand some circus entertainment)—are made structures and pens to house his basic economic principles, which at the firm level in response to hens; the hens themselves; equip- we review below, and, when possi- changes in costs (supply side) or ment to collect, sort, clean, and ble, enlist the help of economists. consumer preferences (demand package the eggs; feed and medi- side). As such, we focus here on cines to keep the hens alive; car- microeconomic principles. tons and packaging; trucks to ship The Economy In Figure 1, the economy is illus- the cartons; and employees to People often refer to “the econ- trated as two concentric circles. In assist with all aspects of produc- omy” without much understanding a market economy, there are two tion. Having invested in these fac- of its fundamentals. There are two markets: the factor market and the tors, the farmer produces eggs for 159 stores alongside thousands of other Figure 1 products, each with its own unique “The Economy” market at play. As such, firms can- not “price discriminate,” that is, set a different price for every con- sumer’s unique willingness to pay. Product Market Goods and Services Even though you might be willing to pay $2 for a bag of peanuts, and Money one of the authors is only willing to (Payments for goods pay $1, the selling firm must select and services) a single price–one it hopes will maximize its profits given our dif- Firms And don’t forget about the taxes.... ferent preferences. Households What becomes relevant then is the overall supply and demand Money schedules. Supply is measured as (Wages, rent, and interest) the sum of individual firm supply schedules, and demand is the sum Factors of Production Factor Market (Capital, land, and labor) of individual household demand schedules. The “market clearing” price and quantity for the good are sale to the public. In the product and subsidies that may further set by the intersection of the will- market, when the eggs are sold, alter his cost structure. We discuss ingness of suppliers to supply and the payments received by the egg the role of government in creating consumers demand for the product. farmer go to pay for the costs asso- or eliminating distortions in mar- This relationship is illustrated in ciated with producing the eggs. kets through use of the tax system, Figure 2. At any given price, the The farmer pays wages to his subsidies, or other policies later. firms in this product market are will- employees, rent to a property ing to supply some quantity of a owner (or bank, if there’s a mort- good that is demanded by con- gage), and interest on any loans Supply and sumers. The higher the price people taken to purchase the equipment are willing to pay, the higher quan- or otherwise manage cash flow. Demand tity a firm will be willing to supply. The relative volume of products The government’s role in these The converse is also true: if the will- and money that flows between markets is pervasive. Taxes are ingness to pay for a given product is households and firms in the econ- taken or expressly relieved at lower, firms will supply a lesser quan- omy is driven by supply (availability almost every juncture. The farmer tity. The demand curve declines of specific goods) and demand may be exempted from sales taxes because consumers are allocating (desire for those goods). Each that would otherwise be levied on among scarce resources. At higher product has its own market and his equipment purchases and also prices for any given goods, fewer supply and demand characteris- may deduct business expenses consumers are willing or able to pur- tics. Each firm in a given product from annual income taxes, but he chase them. Conversely, as goods market has its own supply curve pays taxes on wages paid to become widely available at lower driven by its cost structure—that employees and any profits earned prices, more people are willing or is, the firm can calculate for any from the business. Households, able to purchase them. given price what quantity of goods which pay taxes on other nonfood The market is said to “clear” at it can produce and still earn a rea- goods, are expressly exempt from equilibrium: supply and demand sonable profit margin. Each con- sales taxes on eggs because of gov- intersect where the amount de- sumer in a given product market ernment policy. The farmer’s work- manded equals the amount sup- has an individual demand curve: ers pay taxes on their income plied, at what’s called the “market each of us has a personal schedule earned, and the banks, landlords, clearing” price. In Figure 2, given of prices we’re willing to pay for and equipment makers also pay Demand , this happens at a quan- various quantities of that good. 1 taxes on any profits earned from tity of Q and a price of P , the In today’s complex product econ- 1 1 their business dealings with the product of which determines the omy, few buyers and sellers meet egg farmer. Finally, beyond the tax total revenue received by the firms. to negotiate specific terms. In- effect, the farmer may be eligible The slope of the two curves stead, most products are sold in for various government programs is determined by the degree of 160 The State of the Animals IV: 2007 increases. If the price of freshly Figure 2 baked bread from the bakery rose Supply and Demand somewhat, for example, many con- sumers would decide to switch to Supply processed bread from the bread aisle. On the supply side, firms have varying flexibility to respond to P2 price changes with contraction or expansion of the number of goods supplied. For some products they P1 may be able to expand supply rapidly to take advantage of higher prices in a market; for others, they might have more limited ability to react. Demand2 Short- and long-term scenarios can adjust the price elasticity of both Demand1 supply and demand over time, but P x Q = Revenue measuring elasticity plays a key role in evaluating consumer and firm responses to changes in the market Q1 Q2 environment, including changing information, cost structures, and preferences relating to improving animal welfare. Figure 3 The characteristics and observa- Trade-off: Welfare and Efficiency tions that drive supply and de- mand curves can and do change in reaction to endogenous (within the market) and exogenous (be- B yond the market) factors. Endoge- A nous factors might be new ver- sions of products or marketing C campaigns that alter supply or Animal demand or both. Exogenous fac- Welfare tors can include new information (e.g., independent research show- D ing ill health effects associated with a given product), disasters (natural, disease outbreaks, ter- rorist attacks), or the introduc- tion of competing products with different (better) characteristics. Minimum = Cruelty Production Efficiency When changes like this occur, sup- ply and demand can shift in or out, causing a new equilibrium “elasticity” in the market.