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lecture14_2_28_11_large - LECTURE 14 The Economics of...

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Unformatted text preview: LECTURE 14: The Economics of Famines •Why do we consider famines as a special case in this class? •We could consider the demand for food just as we have the demand for any other health input •But the supply-side is a bit different •In particular, in many developing countries, agricultural production is a primary economic activity (and primary source of income) •So economy-wide economic activity becomes more relevant in analyzing food markets •The topic of famines is an example of how careful thinking about supply and demand in equilibrium can lead to insights that may otherwise seem counter-intuitive •Example: depending on the circumstances, food may be exported from regions experiencing famines (true of the Great Irish Potato famine, also of the Ethiopian famine that we read about for today) •Understanding the root cause of a famine is essential for knowing how to alleviate it – in some cases, for example, food aid may not be the best approach… •Some preliminary conceptual points: •Consider a region with both agricultural producers (farmers) and consumers. When the region experiences an adverse environmental shock (like a drought), who is harmed? •2 Cases: •(1) Open economy case •Weather shock occurs, agricultural output ↓ •What happens to agricultural prices? Agricultural products are imported, prices unchanged •Who is harmed? Farmers (not consumers) – farmers produce less but get the same price per unit •Complicating second-order effects – farmers with low income demand fewer goods produced by non-farmers, so non-farmer income may also fall, etc. •(2) Closed economy case •Weather shock occurs, agricultural output ↓ •What happens to agricultural prices? •Supply shifts in, prices ↑ •Who is harmed? Depending on structure of the market and other factors, farmers’ income could rise or fall (sell less, but earn more per unit sold) - but consumer prices will unambiguously rise •Again complicating second-order effects – consumers paying higher food prices may demand less of other goods, shifting demand for them in and hurting the producers of those goods, etc. •(3) Other types of cases are possible where the initial economic shock is unrelated to agriculture •Consider an open economy where a large non-agricultural employer goes out of business •Employment and income fall, reducing demand for food •Price of food may initially fall, leading food producers to export food; food prices will ultimately equal prices abroad •So could have people struggling to buy food, poor...
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lecture14_2_28_11_large - LECTURE 14 The Economics of...

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