Your economic consulting firm was recently hired by the Pres

Your economic consulting firm was recently hired by the President to advise on an upcoming environmental policy. The President is going to make a decision on the policy but wants to fully understand all of the economic issues involved. Background: guided discussion Your briefing to the President wil involve the trade-offs of implementing the environmental policy. First, a review of the core issues. Imagine a hypothetical country that produces two goods: broccoli and casinos. (a) Why is it most likely that the production possibilities frontier has a bowed-out shape? b) Obviously, it would be better to produce lots of both broccoli and casinos. Are there combinations of broccoli and casinos that are impossible to achieve? Can you explain how to find the feasible but efficient allocations of broccoli? (c) Economic policies can alter the feasible set of production possibilities. But, to a politician they also care about whether their political party will benefit. Suppose that there are two political parties, the Brokesters (who want many casinos) and the Richsters (who want fewer casinos). Now suppose that a breakthrough in education leads to a widespread understanding about the laws of probability, leading both parties to desire fewer casinos. Which party will reap the greater reward, measured by the increase in broccoli production?

Solution

a. The production possibilities frontier gives an idea about the maximum amount of a pair of goods that can both be produced with the available resources in an economy assuming that all the resources & technology available to a country are fixed. Here the two goods in consideration are broccoli & casinos. . The production possibilities frontier has a bowed out shape because of the law of increasing opportunity costs. The law of increasing opportunity costs states that as an economy moves along its production possibilities frontier in the direction of producing more of a particular good, the opportunity cost of additional units of that good will increase. In other words when production unit produces one unit of a good, then the opportunity cost of the other good increases.

As we know that if the quantity of production of one good (say broccoli) increases then the quantity of production of other good (casino) would decreases. In order to increase output of a good, one has to give up some units of the other good as resources are scarce. Therefore it results in production possibilities curve which becomes more & more steep i.e. higher slope and higher opportunity cost.

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b. Yes there are combinations of broccoli & casinos that are impossible to achieve which lie beyond the PPF. It means output combinations outside the PPC are impossible to achieve.