Question

In the movie The Lorax 2012, How did profit maximization play a role in the destruction of the trees? Describe at least two examples of innovation in that we see in the movie. Explain the role of advertising in the movie. How did advertising impact market outcomes? Describe at least two examples of a moral hazard that we see in the movie. What role does a moral hazard play in economics? Would you anticipate that price elasticity for demand for O'Hare Air is elastic, inelastic or unitary elastic and why? Describe at least two ways the government could have or should have intervened in the economy to change the market outcomes of having not trees and dirty air. Why didn’t the government intervene in the market to “fix” these issues?

Answer 1

In the movie Lorax, Once-ler was harvesting the trees for increasing his profits. When his relatives noticed that cutting of more trees will increase the profits of the business, they cut all the trees down to maximize their profits and even the last once remaining. Here we can see that cutting of more trees will lead to extra profit. With each tree being cut down, the marginal revenue increased which led to cutting down of more trees for increased marginal revenue from each tree. So the trees were being cut down to raise the profit even more and thereby leading to profit maximization till he cut down the last tree. So due to the family's profit maximization policy, all the trees were destroyed with no remaining. If they would not have planned to maximize profit, a sustainable harvesting of trees would not have ended the forest and there would be possibilities for growing more trees. So the profit maximization played a major role for destruction of trees.

As there were no trees remaining, oxygen also vanished from the place which led to the emergence of artificial oxygen supply. This new innovated system of oxidizing the city created a market for oxygen cylinders and every person in the town was forced to buy such oxygen supplies as humans cannot survive without oxygen. Another example are the artificial trees and plants which was used to decorate the town so that the townsmen do not feel the importance of trees or plan to grow them. The innovation of artificial oxygen and artificial trees played an important role in the movie.

Advertising was an important part in the movie. We can see that O'Hare advertised his products well to promote its sell while advertising that trees are dangerous to life. As trees were long gone from the town, no one had the information that trees are the main sources of oxygen and by the misleading advertisement of the dangerous nature of trees actually increasing the profits of O'Hare by increased sale of his oxygen supplies. And at the end when Ted showed the real nature of trees and the benefits people get, all the townsmen went against O'Hare sending him out of town. So advertisement plays an important role in the movie which is one of the most important factor for running oxygen business by O'Hare.

With increased advertisement people got the information for the product more rapidly and the sale of the product increased. So when O'Hare advertised his oxygen supplies, people increased their purchases of oxygen. And the market for the product flourished with increased profit for O'Hare.

Moral hazard is a breach where one party provides misleading information to the other party during agreement. In the movie the first moral hazard was led by Once-ler, when he promised Lorax of sustainable harvesting of trees which he did not maintain instead of Lorax's urgent protests till he cut down the last tree. And it was a breach in the agreement between the two. And second example can be the misleading information regarding the trees being dangerous, provided by O'Hare for his own benefit. He provided such misleading information and raised his profit by selling artificial oxygen and the misinformed townsmen suffered the moral hazard as an outcome.

In economics, moral hazard plays an important role. When a party to the contract has incomplete of misleading information which in turn increases the profitability of another party moral hazard takes place. Moral hazards occur due to bad practices of the businesses and market participants with lack of transparency in its operations. When extra risk is taken by the market participants with such misleading information, the market fails due to such loss of the market participants, with one party being ditched and the other party being profitable.

As the town lack from real trees and O'Hare Air is the only source of oxygen in the town, the price elasticity is totally inelastic in the economy. This is because the people in the town do not have any other supplier for oxygen and no real trees. As people cannot survive without oxygen, the market for O'Hare Air is inelastic.

The government should have intervened in the economy to curb the environment and in the first place, the government should have restricted deforestation by implementing Corporate Social Responsibility and Environmental Laws. The government should have restricted such trade practices which resulted in total deforestation. It could have formed sustainable policies for tree harvesting. In the second place the government should have restricted the sale of oxygen for such higher profits with increased prices. As oxygen is a vital source for living, the government should have provided free oxygen in the economy. The government could have also promoted forestation and planting of more trees to curb O'Hare from practicing such unfair trade and monopoly in the market. If the government would have implemented proper environmental policies and trading rules with environment protection laws and corporate responsibility, there would have been enough trees to provide free oxygen and O'Hare Air would never have been making such huge profits by selling oxygen and destroying the environment.

In capitalistic economy with only private sectors in the economy, government has very little intervention in the economy. Mostly it consists of private sectors and private firms for every possible commodity and service. If government keeps on interfering with the businesses in such economy, the output will fall in the overall economy due to decreased production of commodities. So if oxygen was supplied for free, no market for oxygen would have been formed and the production would have decreased. In such economy, the market participants play an important role and the equilibrium is achieved by the working of the market. Government intervention affects the equilibrium position resulting in deficiencies or surpluses in the economy.