Question

Write up a critical overview of the Acai market in Brazil and how the rising price, supported by appropriate diagrams/models, has impacted on the economic welfare of both local consumers and producers. You are expected to provide and discuss two intervention strategies as part of the government’s economic policy strategy to curb the rising price of Acai.

Answer 1

Critical Overview of the Acai Market

The concept of food is changing rapidly over the years. As healthy diet has become more in fashion, nutritionists have labelled some local and previously ordinary food items as “superfoods”. Any nutrition-rich food with more positive impacts than commonly acknowledged has been termed as a superfood. The Acai Berry, which mainly grows in the Brazilian areas of Amazon river, was labelled as a superfood and became famous in the food and nutrition industry. Every geographical region boasts of its own special food item based on differing human requirements due to different climatic conditions of those regions. Acai Berry was previously one such locally grown fruit to serve the diet requirements of poor people. In fact, the Acai Berry was also a Giffen good, whose demand increased with increase in price because people shifted consumption from the less inferior good to the more inferior goods. However, with changing concepts of food and celebrating nutrition, the Acai Berry became a superfood- kind of like the protagonist of the Oscar winning film “Slumdog Millionaire”.

With increased worldwide demand, the prices of Acai Berry shot up to match with the rising demand. Since this demand rise was due to a shift in consumers’ tastes and preferences, the demand curve has a rightward SHIFT from D to D’ as shown in figure 1 in blue. This rise in demand along with negative effect of sharp rise in price also has had a lot of positive impacts. Increased work opportunities in the Acai Berry industry led to increase in revenue. The Acai Berry market has become increasingly competitive over the years which also invited superior technology to cater to the ever rising demand for that fruit and supply of Acai Berry increased from S to S’ as shown in the figure in orange. However, since the number of consumers was multiples higher than the number of producers, the increase in supply couldn’t and still cannot match the increase in demand which is why increasing prices couldn’t be fought.

Economic Welfare

Consumers Surplus(CS) refers to the difference in a consumer’s willingness to pay and actual price paid. Graphically it refers to the area below the demand curve and above the price. Producers surplus (PS) is the difference between actual price received after selling and the minimum price representing willingness to sell. Graphically it refers to the area above the supply curve and below the price. Since the willingness to pay from consumers end did not fall (and in fact increased) due to the high nutrition content and benefits of consuming Acai, consumers’ surplus also did not fall with rising prices. It in fact increased from CS ( area ABC shown in yellow ) to CS’ (area A’B’C’ shown in pink). As the price received by sellers increased further, the producers’ surplus also increased from PS (area DCB shown in green ) to PS’ (area D’C’B’ shown in purple) and thus total surplus or economic welfare of people increased over time from ABD to A’B’D’ (Total surplus= Consumers’ surplus + producers’ surplus). This is shown in figure A.

However, this is the net economic welfare when the broader picture is looked at. The reality is that since Acai Berry was a Giffen good previously, it used to be a poor man’s food. Thus, those very poor local consumers were excluded from the market because they couldn’t pay for the new costly Acai Berry and this led to a leftward shift in the local consumers’ demand curve from D to D’ in figure 2. Similarly with cutting edge technology and increased competition, local producers were thrown out of the competition with their indigenous production methods shifting their supply from S to S’. Thus their producers’ surplus fell from area DCB in green to D’C’B’ in pink and consumers surplus fell from area ACB in yellow to A’C’B’ in purple thereby reducing economic welfare of the very local with a fall in total surplus from ADB to A’D’B’. This is shown in figure B representing the local market.

In both the diagrams, equilibrium price rises from P to P'. In Figur A, equlibrium quantity rises from Q to Q' and in figure B equilibrium quantity falls from Q to Q'.

Government Intervention

When free markets fail to protect certain sections of the economy, it becomes the duty of the government to intervene through certain instruments in order to fight the rising price and falling economic welfare of locals. There are certain measures that the government can take to protect these marginalized local consumers and producers who lose their way in the face of increased competition and posh nutritional outlooks, thereby being robbed of the basic minimum requirements for their survival. Some of the two measures are:

• Imposing a Quota on export of Acai: This simple measure will restrict the quantity sold legally and will allow the domestic supply of Acai to increase thereby reducing the domestic price of Acai. This will increase the affordability of Acai among the local, poor consumers and will also support the native small local producers of Acai Berry in Brazil.
• Imposing a Tariff on the export price of Acai: This will help increase the price of Acai further in the international market and will drive down international demand. As a result, domestic supply will increase due to unchanged domestic demand and both local consumers and local producers will be better off. However, since previously mentioned that the willingness to pay isn’t falling with an increase in price, unless the export tariff is really huge, not much difference will be made in favour of local producers and consumers of Acai with the help of tariff. A quota on the other hand will definitely protect those locals with a legal ceiling on the quantity of Acai exported.