Courtesy of teammate Will Magnum for the collaboration:

Field and Field (2015) Chapter 3: Benefits and Costs, Supply and Demand

“Supply Response, Marginal Cost, and Soil Erosion Implications of Stover-based Biofuels”

Topics: Aggregate Demand/Willingness to Pay, Opportunity Costs, Private

Costs, Social Costs, Equimarginal Principle, Marginal Cost and Supply

Economic Concepts:

Opportunity Cost — Goods and services cannot be produced out of thin air. They require the expenditure of productive resources, or inputs, in the process. The opportunity cost is the maximum value of the alternative output that could have been obtained had a firm used the resources differently. It is essentially the material a firm must give up producing a good. Opportunity cost is measured by the market value of inputs used in the production process.

Technological Change — The quantity of output a firm generates from a given set of inputs depends on the technical and human capabilities inherent in the inputs. The most important factor affecting the shapes of marginal cost functions is the technology of the production process. A technological change provides ways to produce goods with fewer environmental side effects and also enhances ways of handling the quantities of remaining production residuals. It shifts marginal cost

curves downward because it increases output at a lower marginal cost.

Equimarginal Principle — A firm having a variety of production resources and methods results in the lowest total cost. The total cost is lowered by reallocating production after understanding which resources and methods are efficient.

Marginal Cost — Change in total cost of a good’s production by adding one unit

Supply Response — The market’s reaction to a supply increase of a product

Terms:

Soil Erosion — The displacement of the soil’s upper layer

Biofuels — Fuel produced from biomass. Methods to produce biofuels include chemical reactions, fermentation, and heat to break down molecules in plants.

Cellulosic Biofuel — Ethanol (ethyl alcohol) produced from cellulose (the stringy fiber of a plant) rather than from the plant’s seeds or fruit. It is a biofuel produced from grasses, wood, algae, or other plants

Corn Stover — Leaves and field stalks of corn, these will be used to make the cellulosic biofuel. The environmental impact of producing stover would cause significant soil erosion without technological change (Sesmero et al 2015)

Article Summary:

The article addresses issues of producing and transporting cellulosic biofuels and harnesses the equimarginal principle to devise optimal courses of action. The researchers predicted pricing strategy for selling the cellulosic biofuel based on supply and demand curves. After, they declared implementing cover crops will be crucial to preventing soil erosion as it has a lower opportunity cost compared to previously used biofuel production methods (Sesmero et al 2015). The researchers found a market for stover may result in decreased soil erosion because it involves relocating land for continuous corn residue removal. Along with reducing soil erosion, the new farmland would be relocated to a space later surrounded by the manufacturing plant for the biofuel. Doing so would significantly reduce transportation costs which would then increase the price and supply of the product (Sesmero et al 2015). The plants producing stover then

need to determine the marginal cost to consistently procure stover. The specific price can determine whether cellulosic biofuel is viable in the current energy market. The research study examined the response of stover supply density and how its price is driven by technological change.

Assessment:

The article fills in the blanks where past research has failed. Not only did the researchers analyze the economic factors of using stover, but they also conducted specific price analytics and determined how it impacts the biofuels market (Sesmero et al 2015). Their conclusion is remarkable considering it was based on farm-level data collected over many years. Based on the simulation of data, the researchers predicted stover supply curves with and without cover crops to reduce soil erosion.

Implications:

The researchers showed change in stover price offered by a manufacturing plant impacts the quality of land. As a professional in the environmental community noticing a potential solution to undercut fossil fuel prices and disrupt the market, it’s interesting to consider whether it’s logical to abruptly introduce it or slowly merge it into the existing market. Also, the article brings into question whether it’s cost-effective to devote funds to research when it is difficult to completely control a study. For example, it’s difficult to distinguish whether reduced soil erosion is a result of implementing cover crops or a lower stover removal rate (Sesmero et al 2015). It redirects the conversation to understanding additional ways to gather information for technological change.

Class Questions:

If planting cover crops is beneficial in reducing soil erosion, how could one efficiently incorporate it into the total production cost of a manufacturing plant?

Use the logic of willingness to pay to interpret the statement “I like clean air more than you do.” (Field and Field 2017, 69)

Consider the marginal cost curve associated with cleaning your dorm room. Label the vertical axis “time” and the horizontal axis “percent clean.” What would this marginal cost curve look like? (Field and Field 2017, 69)

Somebody invents a small machine that electrostatically is able to remove dust from rooms very quickly. What does this do to the curve in question 6? (Field and Field 2017, 69)

References:

Sesmero, Juan, Michelle Pratt, and Wallace Tyner. “Supply Response, Marginal Cost, and Soil Erosion Implications of Stover-based Biofuels” Applied Economic Perspectives and Policy (2015) volume 37, number 3, pp. 502– 523. doi:10.1093/aepp/ppu042.

While time is objectively quantifiable, how do we define 100% clean? How do we even define 50% clean? This is an example of a unit being numerical and still difficult to measure. Defining percent clean is crucial in determining which technological change to implement. In turn, the technological change then impacts marginal cost. For example, I would not be willing to pay for the vacuum if dust on the floor is not a significant element impacting the “percent clean” value. If clothes on the floor just need to be folded inside the dresser for a room to reach 100% clean, then I would not be willing to devote time to taking clothes to the laundry mat. That being said, I learned it is crucial for a company to clearly understand its output vision before investing in technological change.