Read the summary and the most important questions on Economics of Agribusiness | Gardebroek & Peerlings

• 1 Position of agriculture and agribusiness within the economy

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• If Dutch agriculture would stop its production (so agricultural production equals 0) would that imply that the GDP in the Netherlands decreases with 1.6%?

  No, Gross Domestic Product would decrease more because input-delivering and output-processing industries would also be affected. In the longer term with perfect working factor markets production factors would be employed somewhere else in the economy and the decrease could be smaller

• Mention two positive external effects and two negative external effects.

  Positive external effects: landscape and CO2 that make plants grow faster in agriculture (it is also a negative external effect because it contributes to global warning). 

  Negative external effects: bad smell and ammonia emissions. 

  
  

• To curb down negative external effects local, national, international and global policies are implemented. What determines the optimal level (local, national, etc.)? 

  The optimal level is determined by the level at which the negative effects are produced and the negative effects occur. These levels do not have to be equal. For example, most CO2 emissions are produced in developed countries while the whole world is affected by the greenhouse effect that is caused by these emissions. 

  
  

• If emissions of a pollutant are taxed what are then the effects for the level of pollution?

  Emissions would be reduced. The tax would be internalised in the price of the product(s) of which the pollutant is an external effect. For example, to produce steel a lot of coal is used. This causes the emission of CO2 . Taxing CO2 emissions would lead to a price increase of steel and therefore to less CO2 production.

• Which economic agents value a beautiful landscape positively?

  Consumers value a beautiful landscape positively. In general consumers who recreate in the countryside and consumers with a high income value landscape most

• Contributes a beautiful landscape to national income?

  A beautiful landscape does not affect national income. Landscape production (e.g. planting trees or digging ponds) involves normal production activities and therefore contributes to national income. 

• 2 Production and technological change

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• Why would neo-classical theory assume that the production function is non-decreasing in inputs?

  If it would be decreasing it wouldn’t make sense to use more inputs in production since output would decline. In the extreme case you could produce output with no inputs. 

  
  

• Why would neo-classical theory assume that the production function is concave in inputs? 

  Concavity implies that the marginal product decreases. If it would increase it would imply that an input increase would lead to a more than proportional increase in output. This would imply that it is always profitable to increase output.

• What are variable inputs? Why is land mostly not considered as a variable input?

  With variable inputs the quantity of input use can be adjusted in the short-term. In case of profit maximisation the optimal level of input use is there where marginal costs equal marginal revenue. However in the short run the company can not adjust the quantity of land. 

  
  

• What is a substitution elasticity? What is the value of the substitution elasticity between variable inputs and land? 

  The substitution elasticity describes the curvature of an isoquant (combinations of two inputs giving the same level of output).

   σ = 0 →no substitution 

   σ = ∞ →infinite substitution 

   In a Cobb-Douglas function σ is equal to 1