Thursday, March 30, 2017

The Key to Ending Ivory Trade is not Bans, but Increase in Supply of Ivory in the Market

In economics, there is a type of product called "Veblen good" that does not contradicts the normal supply-and-demand relationships.  For a normal good, a decrease in supply corresponds to an increase in price, leading to a corresponding drop in demand as consumers reduce consumption and/or seek out cheaper substitutes for the now more expensive product.  But for a Veblen good, while decrease in supply also leads to a price increase, demand actually surges, with consumers assigning higher value to the good due to the higher price of the good.

In other words, Veblen goods are products for which primary source of valuation does not come from outstanding benefits compared to cost (as is the case for normal good) but simply for the rarity of the product itself.  As the product becomes harder to acquire on the open market, the willingness to pay of the consumer increases in turn, creating a vicious cycle where demand to continue increasing due to increase in prices, further pushing up prices and demands in tantum.  Conversely, if price decrease occurs, the product becomes less desirable, decreasing demand and leading to further decline in prices.

Perhaps the best example of a Veblen good is diamond (not the industrial kind but the kind associated with wedding rings).  Diamond rings are priced based on supposed rarity of the size/beauty of the gemstone, and purchasers are willing to pay the high price knowing the rarity.  Many other luxury products, most prominently the "limited edition" whatevers that go for high prices (and even higher during auctions years and decades later) follow the same rule simply because only a few of the good exists in the world.  By advertising how little there is of the thing, the company who made the thing can make more money on the thing.

This is exactly the thought that crossed the author's mind when he read the local English-language paper's headline today.  "African governments applaud China's efforts to ban all ivory trade," the newspaper read, obviously connoting that there now is renewed hope for Africa's wild elephants now that many more will not be killed to supply the Chinese market.  Yet, if one had known about the concept of Veblen goods as noted above, one would be very worried.  If anything, the fact that there is an outright ban on ivory trade may drive the whole thing underground, boosting demand and making poaching every more lucrative in the future.

Why?  One obvious point is that ivory is a Veblen good.  To this day, ivory is used on furnitures and decorative sculptures as a sign of conspicuous consumption by the rich.  The rarer the ivory, the more expensive it gets, and the more people want them as a way to show off how rich they are.  Add on to this fact is the fact that black markets tend to make products more expensive in general.  The need to circumvent the laws to get hold of supplies (whether it be through convoluted measures to avoid detection or outright bribery of customs officials to turn a blind eye) tends to be expensive, and the extra costs go into sales price.

Moreover, black market trade favors formation of cartels.  After all, when the trade is illegal, only few players are capable of mustering the courage and fielding the resources needed to continue the trade against open crackdown from law enforcement agencies.  And once cartels are formed, they hold clear control over their respective sections of the trade through dominant logistic networks and violence, making the barrier to entry prohibitively high for aspirants.  This clearly explains why the illicit drug trade in Mexico, for instance, are controlled by a few cartels with their respective spheres of influence and operations.

The existence of cartels have overwhelming effect on prices.  For diamonds, the De Beers cartel control a majority of the world's diamond mines, allowing them to hoard rough diamonds mined in order to choke off supplies, keep good gemstones rare, and justify high prices for the end consumer.  Ivory may face the same situation once it becomes clearly illegal.  Only smuggling ring with deep pockets and unparalleled audacity will stay in the market by bribing officials and dodging punishments, giving them oligopolistic control on the entire trade.  They will do exactly what De Beers has done with diamond to keep ivory prices high.

Of course, in this scenario, the rich consumers of ivory will be galvanized, demand and prices increased, poaching even more incentivized as the whole trade becomes more lucrative.  The ban itself would eventually cause more poaching, dominated larger, more fearsome syndicates with more money, more connection to government insiders, who will be become more and more difficult to uproot as their hold on the now-illicit trade becomes even more institutionalized.  In essence, the ban on ivory trade will exacerbate the problem of poaching by creating more incentives for a few skilled poachers to make more money than before.

So what would be a better solution to the problem?  The answer again lies in the fact that ivory is a Veblen good.  As noted above, demand for Veblen goods decrease as price decreases.  If the good is too cheap, it no longer works as a credible form of conspicuous consumption.  And to decrease price, the easiest way is to simply increase supply.  As tons after tons of cheap ivory flood the market, it will soon be seen as a material no more valuable than plastic or wood, turning away all the rich buyers.  And given ivory's complete absence in mass production today, its demand would taper off as rich buyers disappear.

Thankfully, ivory, unlike diamond, can be "grown" anywhere at any amount as long as the investments are made.  All it takes, really, is starting up a few elephant or rhino ranches, where the animals are raised in captivity specifically for the ivory.  Given current high prices, investments in such ranches should make financial sense, and as rich buyers turn away, the ranches can be gradually shut down.  By the time all such ranches are shut down, behavioral changes among the rich should make it improbable for customers to return, keeping demand and price of ivory low permanently.

Yes, some may argue that raising elephants and rhinos in captivity for their horns sounds extremely unethical.  But if they consider that the tradeoff of not having such farms is continued poaching of wild ones in national parks, the moral argument cannot stand.  And if they argue that more can be done to reduce the demand for ivory without changes in supply, they evidently have little understanding of how Veblen goods or behavioral change works.  The most effective and permanent changes in purchasing behavior are ones that change the underly economic incentives, and in case of ivory, supply increase, rather than bans, provide the incentive.

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