Free Slides from Ed Dolan’s Econ Blog http://dolanecon. blogspot Free Slides from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Afghan Opium Blight: Strategic Implications of Elasticity Posting prepared May 13, 2010 Terms of Use: You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics, from BVT Publishers. Check it out at http://www.bvtpublishing.com/disciplines.php?Economics
Blight Strikes Afghan Opium Crop In 2010, a blight has hit the Afghan opium poppy crop (and possibly the crop in other Asian countries) Since opium is an important source of revenue for the Taliban insurgency, the blight might at first seem helpful to the Afghan government and its NATO allies However, economic analysis suggests that the blight may be a mixed blessing Opium Poppies Source: PDClipart.com Posting P100513 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
Elasticity of Demand for Opium We can start by using the midpoint formula to calculate the approximate elasticity of demand for opium The UN estimates that the blight has reduced the 2010 opium crop by 33% and driven up prices by 57% Using an index of 100 for the base-year value of price and quantity, this implies an approximate elasticity of demand of -.89 (inelastic demand) Posting P100513 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
Effect of the Blight on Revenue When demand is inelastic, a decrease in quantity causes total revenue to increase Example: A farmer who earned $10,000 in 2009 growing 100 kilos of opium at $100 a kilo would earn $10,519 in 2010 by growing 67 kilos at $157 a kilo Posting P100513 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
Who Holds the Opium Stocks? In reality, most of the increased revenue may not go to farmers, but instead to Taliban middlemen, who are believed to hold large stocks of previously produced opium On balance, then, the effects of the reduced opium crop work against the strategic interests of NATO forces fighting the Taliban Posting P100513 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
The Law of Unintended Consequences Early in the Afghan war, NATO troops used chemical sprays to try to eradicate poppy crops The results: A sharp spike in poppy prices, similar to that caused by the blight An increase, not a decrease in funds available to the Taliban Anger among farmers, who lost their crops while middlemen earned windfall profits on opium stocks Having learned a lesson from the law of unintended consequences, NATO has abandoned eradication The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups. —Henry Hazlitt Economics in One Lesson (1946) Posting P100513 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/