From the article “to understand a tax on Mexican imports consider the avocado”
The article insinuates that domestic (U.S. based) Avocado producers will plant more trees after a tax is implemented. Why would this be true? How does a price change impact the decision to produce? Your explanation should include a definition and description of Opportunity Cost and the Law of Increasing Costs
The possible increase in domestic avocado production mentioned in the article can be understood by considering the impact of a tax on Mexican imports. A tax on Mexican avocado imports would likely result in higher prices for imported avocados, making them less competitive in the U.S. market. As a result, domestic avocado producers may see this as an opportunity to expand their production and profit from the higher prices.
To understand why a price change can impact the decision to produce, we need to introduce the concepts of opportunity cost and the law of increasing costs.
Opportunity cost refers to the value of the next best alternative that must be foregone when making a choice. In the context of avocado production, opportunity cost can be thought of as the potential profit that a producer could earn from using their resources to produce an alternative crop or engage in a different economic activity. When the price of avocados increases due to a tax on imports, the opportunity cost of producing avocados becomes more favorable compared to other alternatives.
The law of increasing costs is another important concept to consider. According to this law, as the production of a particular good increases, the opportunity cost of producing an additional unit of that good also increases. In the case of domestic avocado production, the law of increasing costs suggests that as more avocado trees are planted and more avocados are produced, the resources (such as land, labor, and capital) used in avocado production become less suited or specialized for growing avocados efficiently. This means that, over time, it becomes more costly or requires more resources to produce additional avocados.
Therefore, with the implementation of a tax on Mexican avocado imports, the higher prices for avocados would make domestic production more profitable, thereby decreasing the opportunity cost of producing avocados. This reduced opportunity cost, coupled with the potential profitability, could incentivize domestic avocado producers to plant more avocado trees and expand their production. However, it is important to note that the decision to increase production would depend on various factors, such as the availability of suitable land, labor, capital, and the overall market demand for avocados.