1. In the state of California, rice growers burn their field stubble to sanitize
ID: 1228934 • Letter: 1
Question
1. In the state of California, rice growers burn their field stubble to sanitize their fields. The field burning causes serious air pollution. The alternative sanitizing method costs $150 per acre. Consider a county where rice farmers are currently willing to pay $500 per acre for land, and corn farmers (who do not sanitize their fields) are willing to pay $300 per acre. The total output of the county is small enough that the prices of rice and corn are unaffected by events in the county. Suppose that field burning is outlawed in the county, forcing rice farmers to switch to the alternative sanitizing method.a. How does the field-burning law affect rice consumers, corn consumers, farmers, and landowners? In other words, who bears the cost of the pollution-control program?
b. How would your answer to (a) change if the cost of the alternative method were $250?
c. How would your answer to (b) change if field burning were outlawed in the entire state of California?
Explanation / Answer
a) Rice consumers and corn consumers: No impact of the law, as farmers in this county are too small to change prices. Rice Farmers: Farmers are now willing to pay up to $350/acre of land; they still outbid corn farmers. Farmers still get zero profits, but pay lower rent. Corn Farmers: There are no corn farmers in this county, because corn farmers are (still) everywhere outbid by rice farmers. Landowners: The value of land falls by the cost of sanitizing, so landowners lose some wealth. b) Rice consumers and corn consumers: No change. Rice Farmers: Farmers are now willing to pay up to $250/acre of land; they are now everywhere outbid by corn farmers, and either move elsewhere or start planting corn. Corn Farmers: Now there are only corn farmers. Landowners: The value of land falls by the cost of sanitizing, so landowners lose some wealth. c) California accounts for about 20 percent of US rice production; as some of US rice is exported, it accounts for even more of domestic rice consumption (you can read about rice production in California here: http://www.calrice.org/documents/2007StatisticalReport.pdf). In other words, an increase in cost in rice production in California would increase the cost of rice. Rice consumers are hurt as the price of rice increases. Corn consumers could be helped if the supply of corn increases if some land previously used for rice is now used for corn (which would decrease the price of corn). Rice farmers are still out of business; corn farmers are in business and earn zero profits. The increase in the price of rice should increase the amount of rent rice farmers would offer for land, but there will be rice farmers only if the price increases so much that rice farmers outbid corn farmers. Corn farmers may offer slightly lower rents due to the decline in corn prices. Landowners get the residuals.
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