China's Pork Market — Elasticities, Externalities and Government Intervention
Case
Table 1: Income elasticity of demand for meat products by urban households in China
| Meat | Low Income | Lower Middle Income | Upper Middle Income | High Income |
|---|---|---|---|---|
| Pork | 0.44 | 0.13 | 0.09 | 0.03 |
| Poultry | 0.78 | 0.38 | 0.33 | 0.28 |
Source: Economic Research Service, US Department of Agriculture
Table 2: Price elasticity of demand for pork in China
| Urban Households | Rural Households | |
|---|---|---|
| Pork | −1.59 | −0.66 |
Source: Economic Research Service, US Department of Agriculture
Extract 1: China’s pork industry trends
China’s pork market, the world’s largest, is expected to sustain a steady growth of 1.3 to 1.4 per cent annually. Growing income, a rising middle class and continual urbanisation would drive Chinese consumers towards a diet based more heavily on animal protein. By 2026, an average Chinese citizen is expected to consume 55 kilograms of meat per year. While pork will remain the Chinese people’s favourite meat, making up about 60 per cent of all meat consumption, there are other options like poultry, beef, veal, mutton and lamb. The country’s appetite for pork has made it heavily dependent on imports of soybeans, a key feed for China’s farmed pigs; soybeans have found themselves on the front line of the escalating trade dispute between the US and China. The Chinese government is moving pig farms away from urban areas and water sources, with many farms in restricted areas forced to close down or relocate; stricter environmental laws have also closed smaller, outdated farms, to the benefit of large-scale enterprises.
Source: DBS Bank, 4 July 2017, and Caixin Global, 12 October 2018
Extract 2: China’s war on pollution roils world’s biggest livestock sector
Hundreds of thousands of small farmers have been forced to close as the government wages a three-year campaign to clean up the world’s biggest livestock sector. Tough new pollution standards ban livestock production near water sources or heavily populated areas. After years of complaints about foul smells and filthy water from unregulated farms, many rural villages now celebrate their pig-free status. The policy will reshape the industry, squeezing out smallholders and boosting the share of industrial-scale farms. Big players like Guangdong Wens Foodstuff Group and New Hope Liuhe, building mega-farms, stand to grab a larger share of the pork market. “Pig farming in China will gradually develop into a semi-monopolistic structure,” said a researcher.
Source: The Straits Times, 6 November 2017
Extract 3: African swine fever hits Chinese pork industry
A deadly, highly contagious virus is threatening pork production in the run-up to Chinese New Year. African swine fever has spread to 12 Chinese provinces, an area home to more than half the country’s pig population. About 70,000 pigs have been culled so far to prevent the spread of the virus, and much of the country’s pig-producing provinces are on lockdown. With the devastation from this outbreak, some pig farmers have started considering switching to raising chickens instead.
Source: The Guardian, 24 October 2018
Extract 4: Chinese pork demand stagnates over health and food safety concerns
Chinese pork consumption grew for decades, reaching a record 57 million tonnes in 2014. Since then, pork consumption has stabilised; consumers may now be demanding quality over quantity. Food safety remains a major national issue, with a history of disease outbreaks, and the general population remains wary of domestic pork products.
Source: Gro Intelligence, 1 November 2017
Questions
(a) Using Table 1, explain what can be inferred about how urban households in China perceive pork as compared to poultry. [2]
(b) From Extracts 1 and 3, identify and explain two relationships between pork and poultry. [4]
(c)(i) With reference to the data, explain how the culling of pigs due to the swine fever outbreak in China might affect revenue earned by urban and rural sellers of pork in China. [3]
(c)(ii) With reference to the data, explain how the culling of pigs due to the swine fever outbreak in China might affect China’s trade balance with the US. [3]
(d) Using the case evidence, assess how the profits of the large pork producers in China might be expected to change in the future. [8]
(e) Discuss the appropriateness of the Chinese government’s decision to close down the pig farms located near urban areas and water sources. [10]
Answers
(a) [2]
From Table 1, the income elasticity of demand (YED) of both pork and poultry is positive but less than 1, so both meats are perceived as normal goods and necessities. Because pork’s YED is lower than poultry’s at every income level, pork is perceived as more of a necessity than poultry.
(b) [4]
Two relationships:
First, substitutes. Extract 1 describes pork as the Chinese people’s “favourite” meat while poultry is another “option”, so the two satisfy the same want. Goods that satisfy the same want are substitutes in demand.
Second, competitive supply. Extract 3 states that “some pig farmers are considering switching to raising chickens instead”, indicating that pork and poultry draw on the same productive inputs (land, farm capacity). Goods that compete for the same inputs are in competitive supply.
(c)(i) [3]
The culling of pigs is a negative supply shock that reduces the supply of pork, raising its price. The effect on sellers’ total revenue depends on the price elasticity of demand (PED). For urban sellers, pork is price-elastic (PED = −1.59 from Table 2), so the higher price causes a more than proportionate fall in quantity exchanged and total revenue falls. For rural sellers, pork is price-inelastic (PED = −0.66), so the higher price causes a less than proportionate fall in quantity and total revenue rises.
(c)(ii) [3]
From Extract 1, soybeans are “a key feed for China’s farmed pigs” — a key input to pork production. As the culling reduces the number of pigs reared, the derived demand for imported US soybeans falls. Ceteris paribus, lower import expenditure on soybeans improves China’s trade balance with the US.
(d) [8]
Unworked in source. The source answer document does not provide a worked response to this part — it carries only the marginal note “We’ll circle back to this question closer to promos.” Per the corpus rule that a worked answer must be complete, this part is recorded as unworked and flagged in the ingestion discrepancies file; the remaining parts of the case study are fully worked above and below.
(e) [10]
Closing down pig farms is a total ban — a regulation that reduces the quantity exchanged of a good to zero. The appropriateness of the decision turns on its net effect on society’s welfare. The stand of this answer is that the ban improves allocative efficiency but, because pork is a necessity, may not be the most appropriate instrument.
A ban reduces negative externalities. Pig farming generates negative externalities in production: Extract 2 reports “foul smells and filthy water” from unregulated farms, harming third parties — an external cost producers do not bear. This creates a marginal external cost (MEC), so marginal social cost (MSC = MPC + MEC) exceeds marginal private cost (MPC). Rational farmers produce at the market output Qm, where MPB meets MPC, beyond the social optimum Qs, where MSC meets MSB.
Since Qm > Qs, there is over-production and a deadweight welfare loss of area Y. A ban forces output to zero, so society instead incurs a deadweight loss of area X, the net social benefit forgone by not producing up to Qs. Because the pollution is severe (“filthy water”), free-market over-production is likely large, so area Y likely exceeds area X — the ban reduces allocative inefficiency overall.
A ban may worsen inequity. Banning only urban farms reduces competition: Extract 2 reports big firms building “mega-farms” set to “grab a larger share” of the market. With smaller urban farms removed, large farms gain market power and can charge higher prices. Since pork is a necessity (Table 1), higher prices raise the cost of living for low-income households, worsening inequity.
Judgement. The appropriateness of the ban depends on the net benefits. If the welfare gain from cleaner air and water exceeds the cost of greater market power and higher prices, the ban is justified. But because pork is a necessity, the government should avoid driving prices up, so a total ban may not be the most appropriate policy. A better instrument would be regulation requiring farms to clean up their pollution, backed by strong punitive measures (heavy fines): this forces producers to internalise the external cost and cut output towards the social optimum Qs without eliminating supply, preserving affordability while correcting the externality.