Economic Tidbits

More Proposition 12 Economics

A few week ago Tidbits featured a story on the U.S. Supreme Court’s decision upholding California’s Proposition 12 and the potential economic effects it might have on the pork industry One potential effect not considered in the story is the potential for higher pork prices to affect the quantity of beef or poultry demanded. Research by agricultural economists at the University of California-Davis estimated retail pork prices in California would increase 8 percent, or $0.25 per pound, with enforcement of Proposition 12. Economic theory would suggest that a price hike for pork would incent California consumers to substitute beef or poultry for pork in their purchases.

Economists utilize elasticities to measure the responsiveness of quantity demanded to price changes. In economic parlance, strong sensitivity to price changes is termed elastic while weak sensitivity is termed inelastic. In this instance, the cross-price elasticities between pork, beef, and poultry are of interest. A 2018 paper by agricultural economists Glynn Tonsor, Jayson Lusk, and Ted Schroeder explored factors in beef demand and estimated a cross-price elasticity between pork prices and the quantity of beef demanded of 0.087—a relatively small, or inelastic, impact. It means a 1 percent increase in the price of pork results in an increase in the quantity of beef demanded of 0.087 percent. If the estimated elasticity holds for consumers in California, the estimated 8 percent increase in the pork price could result in a 0.70 percent increase in the quantity of beef demanded.

It would seem, then, any price increase for pork in California resulting from Proposition 12 will not result in large increases in the quantity of beef demanded. But this exercise points to another element unique to the diversity of agriculture. One sector’s troubles can be another sector’s benefit. For example, a higher price for corn is problematic for livestock feeders or ethanol producers, but beneficial for corn producers. In the case of California’s Proposition 12, pork producers suffer while other meat protein producers could benefit. It’s agriculture’s great balancing act. 

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