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 insinuation in the article that domestic avocado producers would plant more trees after a tax is implemented can be explained by understanding the concepts of opportunity cost and the law of increasing costs.
Opportunity cost is a concept in economics that refers to the value of the best alternative forgone when making a decision. In the case of avocado production, the opportunity cost for domestic producers would be the potential profit they could have earned from producing an alternative crop or investing in another industry or activity, such as expanding their avocado orchards.
The implementation of a tax on Mexican avocado imports would increase the price of imported avocados in the domestic market. This price change would make domestically produced avocados relatively more attractive compared to imported ones, as they would not be subject to the tax. As a result, domestic producers would have the opportunity to earn higher profits due to the increased demand for their avocados.
The decision to produce more avocados would be influenced by the potential increase in profits and the opportunity cost associated with alternative uses of resources. Domestic producers might choose to allocate more resources, such as land, labor, and capital, towards avocado production, as it seems more profitable compared to other alternatives.
However, the law of increasing costs also comes into play. As more resources are allocated to avocado production, the additional units of output might require increasingly more resources. This happens because the most productive resources are usually used first, and as we expand production, less efficient resources must be utilized. For example, domestic producers might need to plant avocado trees on less suitable land or hire additional labor that is less skilled, leading to diminishing returns and higher production costs.
In summary, the price change resulting from the tax on Mexican avocado imports would incentivize domestic producers to allocate more resources to avocado production, as it appears more profitable compared to the alternative uses of those resources. However, the law of increasing costs suggests that as production expands, the additional units of output may require increasingly more resources, potentially reducing the profitability of avocado production in the long run.