How much does consumption affect production?

by erratim 5y5th Jan 20153 min read60 comments

5


A ewe for a ewe

In a discussion with Benquo over his recent suffering-per-calorie estimates I learned that there have been a few different proponents of incorporating short term elasticities into such estimates. But do empirical short term elasticities really improve our estimates of consumption's long term effect on production? For example, if I decide to reduce my lifetime consumption of chicken by one, should I expect the long term production of chicken to drop by ~1, ~0, or something in between?

I believe we should have a relatively strong prior that long term production has a  roughly 1:1 relationship with consumption, including for small individual decisions. Below are a couple arguments I find compelling, and a major exception that is not a short term elasticity.

Black box economies in general

If I go to a large alien civilization of uncertain economic structure and surprise them by buying(?) one widget, how should I expect that to affect their long term production of widgets? Seems like I should expect it to increase by one, because now they have one less than they used to. If it was originally decided that that widget should be produced; why wouldn't they decide to replace it when lost?

Neoclassical capitalism in the long term

In a simplified market, I expect there to be a lowest price at which chickens can be reliably produced at scale ("the Cost"). If producers expect the market price to be less than the Cost in the future, they will shut down production to avoid losses. If they expect it to be more than the Cost in the future, they might expand operations to make more profit. In the long term (when we can ignore temporary shocks to the system and producers have time to make adjustments), I expect the equilibrium price of chicken to approach the Cost of chicken (because other prices lead to conditions that push the price back toward the Cost). In other words, my prior is that the "price elasticity of supply" in the arbitrarily long term becomes arbitrarily high (imagine a virtually horizontal supply curve).

How many chickens will be produced at that long term price? However many are worth the Cost to consumers. If 50% of chicken consumers permanently become vegetarians, I expect that eventually the chicken industry will end up producing about 50% fewer chickens at a price similar to today's.

Similarly if consumption is reduced by just one chicken. My prior is that producers have an unbiased estimate of consumption, and that doesn't change when I eat one less chicken (so my best guess about their long term estimate of consumption drops by one when I forgo one chicken).

Time breaks the elastic limit

Compare my prior that every chicken forgone causes (in the long term) one less chicken to be produced, to the estimates that it only causes 6% or 76% of a chicken to not be produced (as Peter Hurford points out in the second case, the enormous range in these estimates alone is enough to raise flags).

Those numbers sound plausible in the short term when there's a backup in the chicken pipeline and a drop in price because producers were caught off guard by the drop in consumption. But if the vegetarians hold their new diets, won't the producers eventually react to the changed market? When they do I bet the equilibrium price will be somewhere close to the original Cost, and the quantity produced will be about 50% less (not 3% less or even 38% less). I think the thing these elasticity estimates are forgetting is that the producers aren't satisfied (in the long term) with the lower price that results from a chicken glut caused by vegetarianism. If they were, they'd be producing more chickens now.

Said another way, it all comes down to the difference between producers' reaction in the short term vs. the long term. In the short term, when someone decides not to eat a chicken, it goes to the next highest bidder (so price drops and production doesn't change much). But in the long term, producers produce all the chickens that will be demanded at the Cost (they want to produce as many as they can at that price, but if they produce any more, the chickens will be sold at a loss). When one person permanently becomes vegetarian, we should expect that long term size of the industry decreases accordingly.

When the long term Cost changes with industry size

To be clear, if we could actually measure consumption's effect on long term production in specific cases, it would rarely be exactly 1:1, though my prior is that it will average out to that over time. The exception is if consumption consistently affects the long term price in a particular direction. For example, here are some reasons that I might expect the Cost of chicken to grow or shrink as the size of the chicken industry increases:

 

  • Finite inputs such as limited agricultural land (Cost grows with size)
  • The production process also creates another product like eggs (Cost grows with size if marginal production is used for both)
  • Gains to scale such as factory farming (Cost shrinks with size)
  • R&D or innovation (Cost shrinks with size)
  • Favorable government policies (Cost shrinks with size)

 

If we have sufficiently certain estimates on any of these effects, we can certainly try to model them, although it would be a very different exercise than using empirical estimates of short-term elasticities. As it is, I have no idea which of the above effects win out (ie, whether the "consumption elasticity of the Cost" is positive or negative in the long term).

I think we would make our estimates more simple and accurate by sticking with the prior that eating one less chicken causes about one less chicken to be produced in the long term.

5