Changes in the Californian egg market. | tutor2u Economics

Changes in the Californian egg market.

New changes in the egg market in California are a great resource for teaching a number of economic concepts, particularly supply and demand in action. A number of scenarios are possible as different rules in different states impact on egg producers decisions on how to produce their eggs and where to sell them.

It started back in 2008 when Californian voters approved a law that increased the minimum cage area per bird from 67 square inches to 116 square inches, a jump of 70%. That law comes into effect from the beginning of 2015 and applies to all eggs produced and / or sold in California. Therefore, existing facilities will be able to produce less eggs and there will be a clear increase in the cost of production per egg. The outcome predicted by supply and demand analysis would be higher prices and a lower quantity of eggs sold. Initial estimates are that there will be an increase in price in California of 20%.

But what is also intertesting is the dynamics with other producers in states that don’t have the Californian restrictions. The largest producer of eggs is Iowa and they sell a lot of their output to California. Their first option for Iowan producers is to comply with the restrictions so that they can sell their eggs into California. This is likely to lead to a national loss of 10 million egg laying birds (3.3% of the total market). The second option is to ignore the rules and sell only to other states – having the effect of “flooding” the market and driving prices in other states down. The outcomes of these options are shown below.

The link to the article in The Wahington Post is found here. There are a number of issues that could be devloped which make it an eggscellent (groan) topic for a Data Response question. These include

- elasticity of demand (if estimates are correct, the 20% increase in price leading to a 3.3% decrease in national egg production would indicate a price elasticity of -0.17)

- distribution effects (will the increase in egg prices have a disproportinate effect on the poor)?

- demand for substitutes and complements of eggs

And as an extension, since the Califonian law only applies to eggs still in their shells, what other outcomes could occur?

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