In 2010, a blight has hit the Afghan opium poppy crop, and possibly also the crops of other Asian producers. Since opium production is an important source of revenue for the Taliban insurgency, the blight might superficially seem to be good news for the Afghan government and its NATO allies. However, a closer economic analysis suggests that the blight is may not be such a blessing after all.
UN officials estimate that the blight has destroyed a third of the poppy crop, sending the price up by 57 percent. Applying the midpoint formula to these numbers gives an estimated elasticity of demand of -.89 (inelastic demand).
When demand is inelastic, a decrease in quantity causes an increase in revenue. Part of the increase in revenue may accrue to farmers lucky enough to be less affected by the blight. However, observers think that much of the windfall profit goes to Taliban middlemen, who are believed to hold substantial stockpiles of previously produced opium. That would suggest that the blight is a curse both to farmers who have lost their crops, and to NATO forces fighting the insurgency.
Earlier in the war, NATO troops sprayed herbicides in an attempt to eradicate poppy crops. That policy produced an upward spike of prices, similar to that caused by the recent blight. Resources available to the Taliban increased, rather than decreasing, and farmers who lost their crops were turned against foreign forces. Having learned a lesson from the law of unintended consequences, NATO forces have largely abandoned eradication efforts in favor of positive incentives to switch to alternative cash crops. Ironically, the Taliban is now spreading rumors that the blight is caused by NATO bio-warfare efforts, a charge that NATO officials vehemently deny.
Follow this link to download a free set of PowerPoint slides showing elasticity and revenue calculations for Afghan opium. If you like the slides, please post a comment to tell others how you used them in your class.
"NATO forces have largely abandoned eradication efforts in favor of positive incentives to switch to alternative cash crops."ReplyDelete
But ... wouldn't that lower supply without affecting demand ... which would raise prices because of elasticity just like the eradication efforts and ...
or am I confused?
Ah, are you the one that is confused, or are the NATO gurus the ones that can't figure this out? I think the answer must be that a switch to cash crops would have the same effect on opium prices, but would leave farmers wealthier and happier than the effects of a blight that randomly impoverishes some farmers and enriches others. Gosh, there has to be some logical basis for the NATO strategy change, doesn't there?ReplyDelete