Discuss the relevant microeconomic theory

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    Tuesday, 7 February, 2012 9:17AM

    “Betel Nut Banned in Honiara Town”

    The selling of Betel nut in Honiara town has now been banned by the Honiara City Council (HTC), effective from Friday last week.

    The news of the ban would most likely bring a possible backlash from Betel nut vendors who like many other vendors within Honiara, stand to lose a huge portion of their daily income.

    “I make at least SB $200 per day selling Betel nut and that caters for my family’s needs like school fees, what has the HTC done to help people like us?” said a vendor in Honiara.

    The HTC has decided to act on the massive spread of people selling Betel nut, many are erecting stalls, similar to those in Rove, within the Honiara town area.

    “The thing is we are not stopping them from continuing their small businesses, but we want them to sell them outside the town area,” he explained. “Some visitors say that the city of Honiara is very dirty, particularly when people sell Betel nut on the streets.”

    The spokesperson says that those sellers who do not act upon the order will be fined SB$100 on the spot.

    “The Arts festival is just around the corner, so although it may be uncomfortable to many, we must do this to give a good first impression to our visitors.”

    Source: Solomon Times Online

    Assessment Instructions:

    Thoroughly read the article and produce a written report/essay of no more than 500 words. In your report, discuss the following:

    In what way is this article a microeconomic article. Discuss the relevant microeconomic theory or theories given in this article.

    Under which market structures are betel nut sellers classified as. Use evidence from the article to justify your reasons.

    Following the ban, what is most likely going to happen to the prices of betel nut in Honiara city and why? Illustrate with the help of demand/supply graphs.

    Use elasticity theory: evaluate the following statement, “Banning betel- nut sellers in Honiara city may also act as a control mechanism to consumption. Do you agree or disagree with this statement? Discuss.

    Marks will also be awarded for:
    1) appropriate command of English
    2)not exceeding 500 words
    3)bibliography and reference


    Title: The Economic Implications of Betel Nut Ban in Honiara Town

    The article titled “Betel Nut Banned in Honiara Town” discusses the recent ban on the selling of betel nut in Honiara town by the Honiara City Council (HTC). This article can be analyzed from a microeconomic perspective, considering various microeconomic theories and concepts.

    From a microeconomic standpoint, the article highlights the concept of externalities, specifically negative externalities caused by the widespread sale of betel nut in the town. Negative externalities occur when the actions of individuals or firms impose costs on others who are not directly involved in the transactions. In this case, the article suggests that the presence of betel nut vendors contributes to the perception of Honiara as a dirty city, impacting the overall visitor experience. This negative externality justifies the HTC’s decision to ban betel nut sales within the town area to improve the city’s image.

    Betel nut sellers can be classified under the market structure of monopolistic competition. Monopolistic competition is characterized by a large number of firms selling differentiated products. The vendors’ products are not perfect substitutes due to differences in location, presentation, and individual preferences. The article mentions that many vendors are erecting stalls similar to those in Rove, implying that while they are all selling betel nut, they differentiate their offerings by location and presentation.

    Following the ban, the price of betel nut in Honiara city is likely to increase. The ban reduces the supply of betel nut in the town area, shifting the supply curve to the left. This reduction in supply, combined with the fact that demand for betel nut remains relatively constant among its consumers (as evidenced by the vendors’ concerns about losing daily income), leads to an increase in the equilibrium price. This change can be illustrated using a demand and supply graph, with the new equilibrium occurring at a higher price point and a lower quantity.

    The statement “Banning betel nut sellers in Honiara city may also act as a control mechanism to consumption” can be evaluated using elasticity theory. Elasticity measures the responsiveness of quantity demanded to changes in price. In this case, the price elasticity of demand for betel nut is likely to be relatively low, as betel nut is often addictive and has cultural significance, making its consumers less sensitive to price changes. Therefore, the ban may indeed act as a control mechanism on consumption, as the inelastic demand suggests that even if prices increase due to the ban, consumers may continue to purchase betel nut, albeit at a higher price. This implies that the ban might have limited success in reducing consumption, as demand remains relatively unresponsive to price changes.

    In conclusion, the article’s microeconomic analysis reveals the presence of negative externalities caused by the widespread sale of betel nut in Honiara town. The market structure of betel nut sellers aligns with monopolistic competition due to differentiation in location and presentation. The ban is likely to result in higher prices for betel nut due to decreased supply. Elasticity theory suggests that the ban may only moderately control consumption, as the addictive and culturally significant nature of betel nut leads to relatively inelastic demand. Overall, the ban’s economic implications extend beyond mere income loss for vendors, touching upon market dynamics, pricing, and consumption patterns.

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