Course:ECON371/UBCO2009WT1/Group 7/Article4

Analysis

Pesticides are regulated in Canada through Health Canada’s Pest Management Regulatory Agency (PMRA). If Canadian farmers are to remain competitive in the global market the government must ensure they have access to the newest products used by competitors, which meet Canadian regulatory requirements. The net benefit of using pesticides is crop loss is avoided and labour can be reduced which could lead to labour being released from the farm. Pesticides play an important role as farmers continue to work towards producing the safest and highest quality foods possible. Decreasing pesticide use results in reduced food production, higher production costs, increased food prices, and higher levels of malnutrition due to individuals not being able to afford the product.

Supply, Demand and Willingness to Pay

Changes in variable costs are important because they are used to determine shifts in the supply. The combination of yield and cost changes generates an upward supply curve shift. The constant demand curve generates a price increase. This price increase offsets a portion of income effects of the reduction. On the contrary, increased pesticide application only incurs unnecessary expense, damages the environment and threatens the health of farmers and consumers in both rural and urban regions through increased exposure to toxic chemicals. If the demand stays the same for McDonald's buying their potatoes from the crops with decreased pesticide use, then their prices of their products will increase. This may decrease the regular consumer's willingness to pay, decreasing the demand for McDonald's food. However, if they state in their marketing scheme that they are planning to decrease their pesticide use on their potatoes, a new consumer group will be generated to buy their products and the demand curve will shift outward. This would create greater demand for McDonald's food, generating a larger profit.

Pollution

It states in the article, that this act is only in it's early stages, since McDonald's now has to figure out how much pesticides are actually being used on their potatoes. Answering that, will determine how much to cut down on pesticide use. Overall, this will decrease pollution damages, and increase ambient quality. Decreasing pesticide use will have an abatement cost, since it will be more expensive to grow potatoes with less pesticides. More labour may need to be employed to maintain the crops and to keep up with weeds that will be able to grow more easily. Depending on how much pesticides they will end up using will depend on the marginal abatement cost and the marginal damage of using the pesticides. Where the two are equal is where the efficient abatement is, and this will lead to a decision on how much pesticides to use.

Efficiency

Is this an efficient activity to follow through with? I don't think McDonald's is considering using less pesticides because it will decrease their production costs. Their marginal cost may be higher than their marginal benefit if decreasing pesticides increases production costs. It does however, decrease external and social costs, since pollution will decrease. However, I believe they are doing this to create a product which will generate a new, "greener" consumer group. This will increase their profit in the long run. This will also increase the social benefit, since less pesticides will be emitted into the air, which will lead to a healthier environment, which is important to society.

Social Benefit

One way that people solve the food shortage problem is to rely on increased use of pesticides in order to maximize the yield per unit area. But this has inevitably led to attenuation of soil fertility and increasing environmental pollution problems, not only affect the sustainable development of agricultural production, but also affect people's quality of life. As the article mentioned that food companies such as Sysco Corp (SYY.N), General Mills Inc (GIS.N) and Campbell Soup Co (CPB.N) have already shown that cutting pesticide use can makes sense from both an environmental health and business perspective. Hopefully, since McDonald's has such a presence in the fast food market, decreasing the use of pesticides on their potatoes will be involved in their marketing scheme. This would encourage other fast food chains to follow suite and decrease their pesticide use as well, to keep up with the trend. This would increase social benefit even more, compared to the benefit solely from McDonald's decreasing pesticides.

Prof's Comments

I agree that a big driver for McDonald's decision is marketing. You have some elements of the abatement cost and the damage function confused. Abatement cost is all the costs involved in reducing emissions, which in this case is pesticide use. Thus, the need for more labor and the lost yield are all part of the abatement cost. The damages are all the impacts from the pesticide use on people and the environment. Thus this includes the health impacts on people as well as the negative impacts on soil fertility, etc., as well as impacts on the environment that people care about. The role of chemicals and modern technology in ensuring that we are able to feed a still growing world population is certainly an important issue. The role this issue plays in the current story may be that because wealthy western consumers want 'green' food, companies are responding by producing it. As a result, total food production from existing land actually falls. This will increase food prices and hardship among the poor.