APPLYING THE CONCEPT: ECOTOURISM, CATTLE RANCHING AND THE ECONOMY OF COSTA RICA
1.5 APPLYING THE CONCEPT: ECOTOURISM, CATTLE RANCHING AND THE ECONOMY OF COSTA RICA
Figure 1.2 is a graphical depiction of a production possibility frontier (PPF). It shows all the combinations of ecotourism services and cattle-ranching activities a society (in this case Costa Rica) can produce, given resource scarcity, using the existing technology of production in both the ecotourism and the cattle-ranching
sectors of the economy. For example, Costa Rica can produce amount E 3 of ecotourism service if it chooses to use all its available resources to specialize in the production of this service and nothing else. Ecotourism service may entail conserving forestland for purposes such as bird-watching, nature appreciation and aesthetic enjoyment, preserving animal and plant species for biological prospecting, game reserves, and so on. Evidently, ecotourism is a natural resource-intensive industry, and its use as an example in this chapter is prompted by this factor alone.
Similarly, R 3 is the level of cattle-ranching activity that will be taking place if, at a point in time, all Costa Rica’s available resources are used exclusively for this purpose. These are, of course, two extreme cases. The most likely scenario is represented by a mix of both economic activities. Using its available
resources Costa Rica may choose to produce amounts E 1 and R 2 of ecotourism and ranching activities, respectively. What can we learn about choice, opportunity cost and efficiency using the notion of the PPF? First, at a given point in time, we can view the production possibility curve as representing the boundary line between the feasible and infeasible product choices of a society. For example, in Figure 1.2 , product (ecotourism service and cattle) combinations outside the PPF, such as M, are unattainable. On the other hand, the feasible choices represent all the product combinations inside the PPF, such as N, and all the points along the PPF curve. In this sense, although resources are scarce, society is still confronted with an infinite number of feasible choices. However, from a strictly economic viewpoint, there is a significant difference between output choices lying inside the PPF curve and those that are located on the PPF curve. All product
RESOURCES AND RESOURCE SCARCITY 9
Figure 1.2 The production possibility frontier for Costa Rica
combinations inside the PPF curve are regarded as inefficient. For example, point N is regarded as inefficient because Costa Rica could instead, by using the same amount of resources, have produced ecotourism services and cattle output combinations indicated by points A, B and C on the PPF. In so doing, Costa Rica would have been able to produce more of either the ecotourism service or cattle output (point C or A), or more of both products, as indicated by point B.
All output combinations along the PPF curve are regarded as efficient because, by definition, each point represents a full utilization (full employment) of all the available scarce resources at a point in time. Thus, there is no waste or idle resources. Society is still, however, confronted with an infinite number of choices, and any choice along the production possibility curve entails an opportunity cost. For example, in
Figure 1.2 , a move from A to C implies that to increase ecotourism service from E 1 to E 2 Costa Rica has to reduce (sacrifice) its output of cattle from R 2 to R 1 . Thus, unless the country is using its scarce resources inefficiently (such as at point N), economic choices always entail costs in terms of alternative opportunities forgone.
Furthermore, given the normal curvature of the PPF as presented in Figure 1.2 , opportunity cost increases as more and more scarce resources are devoted to further production of a specific product. For example, if ecotourism service is further increased from E 2 to E 3 , the opportunity cost of doing this would suggest a drop of cattle production from R 1 to zero. Clearly, this cost is higher than the opportunity cost implied by an earlier move similar in magnitude when ecotourism service was increased from E 1 to E 2 . Why so? This is because the increase in ecotourism is attained by the use of labor, capital and land that are progressively less suited to this particular endeavor. The reason for this is that although resources (labor, capital and natural resources) are generally fungible, they are not easily adaptable to alternative uses. In other words, some resources are better suited for the production of some goods than they are for other goods.
The case of Costa Rica illustrates increasing opportunity cost and its implication for resource use. In 1970s and early 1980s Costa Rica was pursuing an aggressive economic policy intended to expand its cattle- ranching sector. One of the most notable effects of this policy was the rapid transformation of forestland to pastureland. However, only 10 percent of Costa Rica’s land is suitable for pastureland (Meyer 1993). Given
10 THE “PREANALYTIC” VISION
this, continued expansion in cattle ranching could be realized only at increasing opportunity cost; that is, at incrementally faster rates of deforestation, which was the case during this period.
Furthermore, Costa Rica’s deforestation problem during this period was exacerbated by other economic and institutional factors. Among others, these factors included (a) expanded use of marginal agricultural land to feed a rapidly growing population; (b) distortion of market information by the government subsidies to cattle-ranching operations (more on this in the next chapter); and (c) other institutional factors such as the land tenure system, unwarranted growth of the government sector, and misallocation of resources due to growing external debt.
What has been presented so far is a snapshot of a society’s alternative feasible and efficient output choices. Furthermore, the set of feasible choices that faces a given society is subject to change as technological advances occur. The effect of technological advances is depicted by an outward shift of the PPF curve. In this way, technological change expands a society’s feasible opportunity set. Several factors contribute to the expansion (growth) of the feasible combinations of goods and services that a given society can produce. Major factors include a discovery of new resources (such as a new oil deposit); an increase in the labor force; an increase in production efficiency through factor substitutions (more on this in Chapter 3 ); and an advance in technology representing an entirely new production technique (more on this in Chapter 3 ). It is through these sorts of change that a set that is infeasible at one point in time, such as point M in Figure 1.2 , could become feasible at some point in the future. Technology fosters economic growth.
Last but not least, within this conceptual framework it is important to clearly understand the difference between economic efficiency and optimality. Efficiency simply indicates that the economy is operating on its production possibility curve; that is, resources are used to their full potential. However, as demonstrated by the use of PPF, there is no one unique efficient point. How, then, would society choose a point along its PPF—as it must at a particular point in time? As briefly mentioned earlier, the neoclassical economic response to this question goes as follows: The “optimal” (or best) point along a given PPF of a given country is ultimately determined by the preferences of consumers (citizens). This in turn will determine the market prices for final goods and services produced in an economy at a given point in time. Given these prices, the optimal point along the production possibility frontier is that which yields the maximum market value. Thus, for example, while points A and C are equally efficient, Costa Rica may choose point A (less ecotourism and more cattle ranching) on the grounds that it is associated with a higher level of market value or vice versa. This represents the core ideological position of neoclassical economics; that is, ultimately what is “best” for a society is determined by consumers’ preferences. At the same time, it also reflects the kind of value judgment economists are making in choosing a single point along a given production possibility frontier that theoretically contains an infinite set of efficient points.