Europe faces a flood of cocaine

The Financial Times reported back in July:

Cocaine production in Latin America has quadrupled in the past decade, with criminal networks in Colombia, Peru and Bolivia exploiting global trade routes to shift vast quantities of the drug. Cocaine is also increasingly shipped from Brazil into Europe via west Africa.

The UN warns that supply could soon exceed demand, increasing traffickers’ incentives to dump even more product on to Europe’s streets...

The result is that more cocaine is available in Europe today than in the 1980s — often seen as the drug’s heyday — according to the UN. Last year alone, its residue in city wastewater rose by more than a fifth, according to the EU’s drugs agency...

Lower prices and frictionless dealing on popular encrypted messaging apps have made cocaine more attainable.

My ECONS101 class covered the model of supply and demand last week, and this seems like a good example. The European market for cocaine is shown in the diagram below. The market was initially in equilibrium, where supply S0 meets demand D0. The equilibrium price of cocaine was P0, and the equilibrium quantity traded was Q0. The supply of cocaine has increased (a shift to the right, or down, of the supply curve for cocaine), to S1, due to increased production in Latin America being shipped to Europe. This lowers the equilibrium price of cocaine to P1, and increases the quantity traded to Q1.

However, the increase in cocaine supply hasn't had the same effect everywhere. The FT article also reports that:

One country where the retail price has risen rather than fallen, according to UN data, is the UK, which one former senior European police officer says may be linked either to stronger demand or to traffickers’ perception that it is riskier to smuggle cocaine into the country than elsewhere.

If cocaine traffickers believe that it is riskier to smuggle cocaine into the UK, that would decrease the supply of cocaine, and increase the price (see the diagram above, but with the change in supply reversed). That might also contribute to the increase in supply to Europe, if shipments that previously would have gone to the UK go to continental Europe instead. As for 'stronger demand', that effect is shown in the diagram below. The market was initially in equilibrium, where supply S0 meets demand D0. The equilibrium price of cocaine was P0, and the equilibrium quantity traded was Q0. If supply remained constant, and demand increased (as noted in the FT article), the demand curve shifts to the right (to D1). This increases the equilibrium price of cocaine to P1, and the quantity of cocaine traded to Q1.

The increase in demand could even lead to a price increase even with supply increasing as well. If the supply increased to S1, then the equilibrium price goes back to P0, with the quantity of cocaine traded increasing to Q1. 

Combining an increase in demand with an increase in supply is certain to lead to an increase in the equilibrium quantity. However, the change in the equilibrium price is ambiguous. Any smaller increase in supply than shown in the diagram would lead to a net increase in the price of cocaine in the UK, as would any decrease in supply. Any larger increase in supply would lead the equilibrium price to decrease.

Europe is, of course, not the only country dealing with an influx of cocaine. It has also been in the news in New Zealand recently as well. The underlying drivers are very similar, and are a recurring issue (see this post from 2017, related to the US cocaine market).

Read more:

• Cocaine makes a comeback in the U.S.

Egg prices will rise in New Zealand, even without a major avian flu outbreak

Last year, I posted about avian flu in the US and the impact on egg prices, noting that prices will rise. Thankfully there hasn't been a major outbreak of avian flu in New Zealand as yet, although it seems likely there will be soon. Domestic birds, such as chickens, are at risk, and as I noted in that earlier post, that affects the supply of eggs. And New Zealand egg suppliers are acting now, as the New Zealand Herald reported earlier this week:

It comes as New Zealand’s largest egg supplier Mainland Poultry, accounting for nearly 40% of the country’s eggs, is putting hundreds of thousands of free-range chickens into lockdown after the deadly bird flu virus was detected in the country last week.

Putting free-range chickens into lockdown will raise the costs of production for free-range eggs. The effect on the market for free-range eggs is shown in the diagram below. Before the chickens were locked down, the free-range egg market was in equilibrium, where demand D0 meets supply S0, with a price of P0 and a quantity of free-range eggs traded of Q0. The lockdown increases the costs of producing free-range eggs, which decreases supply to S1. This increases the equilibrium price of free-range eggs to P1, and reduces the quantity of free-range eggs traded to Q1.

Free-range eggs and colony eggs are substitutes. Once free-range eggs become relatively more expensive, some consumers will switch to colony eggs. The effect on the colony eggs market is shown in the diagram below. Before the change in the price of free-range eggs, the market for colony eggs was in equilibrium, where demand DA meets supply SA. The equilibrium price was PA, and the quantity of colony eggs traded was QA. Since some consumers switch to the relatively cheaper colony eggs, that increases the demand for colony eggs from DA to DB, increasing the equilibrium price of colony eggs from PA to PB, and increasing the quantity of colony eggs traded from QA to QB.

Overall, eggs are going to cost more, regardless of whether they are free-range eggs or colony eggs. And even without a major outbreak of avian flu. If avian flu does take hold in New Zealand, the price of eggs of both varieties will go up even further.

Farmers can't avoid high synthetic nitrogen fertiliser prices by switching to organic fertiliser

The New Zealand Herald reported yesterday:

New Zealand farmers face hefty increases in the price of fertiliser this spring as a result of the escalating US-Iran conflict and the war in Ukraine.

The Middle East plays a big role in the global fertiliser market because of its supply of natural gas and mineral resources.

Russia is also a major supplier of fertiliser.

Renewed hostilities in the Persian Gulf – and the virtual closure of the Strait of Hormuz – have driven oil prices up to about US$90 ($154) a barrel for Brent crude, the international benchmark.

Synthetic nitrogen fertiliser is generally manufactured from ammonia created using the Haber-Bosch process. This requires hydrogen, which is often derived from natural gas (mainly methane). Since the Middle East is a major supplier of natural gas, a lot of nitrogen fertiliser is manufactured in the Middle East. The current conflict in the Middle East is constraining the transport of nitrogen fertiliser from the Persian Gulf, reducing the supply of nitrogen fertiliser.

The effect of this on the market for nitrogen fertiliser is shown in the diagram below. The market was initially in equilibrium, where demand D0 meets supply S0, with a price of P0 and a quantity of nitrogen fertiliser traded of Q0. The Middle East conflict reduces shipping of nitrogen fertiliser, which decreases supply to S1. This increases the equilibrium price of nitrogen fertiliser to P1, and reduces the quantity of nitrogen fertiliser traded to Q1.

Can farmers avoid the higher price of nitrogen fertiliser by switching to an alternative product, such as organic fertiliser (compost, or manure)? Not really. Consider what happens in the market for organic fertiliser, shown in the diagram below. Before the change in the price of nitrogen fertiliser, the market for organic fertiliser was in equilibrium, where demand DA meets supply SA. The equilibrium price was PA, and the quantity of organic fertiliser traded was QA. Since nitrogen fertiliser and organic fertiliser are substitutes, and nitrogen fertiliser is now relatively more expensive (as shown above), farmers switch to the relatively cheaper organic fertiliser. That increases the demand for organic fertiliser from DA to DB, increasing the equilibrium price of organic fertiliser from PA to PB, and increasing the quantity of organic fertiliser traded from QA to QB.

So, the effect overall is that the price of both nitrogen fertiliser and organic fertiliser increase. Farmers cannot easily avoid high fertiliser prices. We can expect that to flow through into higher prices for farm produce, as well as lower profits for farmers.

The Strait of Hormuz blockade, trade passes in the Panama Canal, and the cost of imported goods

The New Zealand Herald reported last month:

The war in the Middle East has boosted demand to move vital cargo through the Panama Canal to such an extent that one vessel carrying liquefied natural gas (LNG) paid US$4 million ($6.7m) to skip the line and avoid a wait that can take up to five days, according to an official report.

A surge in such payments has been recorded since the US-Israeli attacks on Iran began February 28, which led to the blockade of the Strait of Hormuz, a critical waterway for one-fifth of the world’s oil and natural gas exports from Gulf countries.

The impact on the price of transits through the Panama Canal is shown in the diagram below. Before the Strait of Hormuz was blockaded, the market for Panama Canal transits was in equilibrium, where demand DA meets supply SA. The equilibrium price was PA, and the quantity of transits was QA. The blockade increased the demand for Panama Canal transits from DA to DB, increasing the equilibrium price of transits from PA to PB, and increasing the quantity of transits from QA to QB.

This increase in the price of Panama Canal transits doesn't just affect the cost of transporting oil or natural gas. Other ships must also pay the higher price. That increases the cost of shipping, which will flow through to the prices of imported goods, as shown in the diagram below. The market was initially in equilibrium, where demand D0 meets supply S0, with a price of P0 and a quantity of imported goods traded of Q0. The higher cost of Panama Canal transits increases the 'costs of production' of imported goods, which decreases supply to S1. This increases the equilibrium price of imported goods to P1, and reduces the quantity of imported goods traded to Q1.

So, it's not just oil and natural gas prices that will be pushed up by the blockade of the Strait of Hormuz. The resulting higher shipping costs will flow through to all sorts of other goods that are traded internationally and require shipping, including and especially those passing through the Panama Canal.

Anticipating higher future petrol prices, consumers actually push up petrol prices now

In his 1984 book The Evolution of Cooperation, Robert Axelrod suggested that people cooperate in repeated games because of 'the shadow of the future'. They alter their behaviour by cooperating now, because they anticipate that will lead to greater gains for them in the future. I really like this analogy of the shadow of the future affecting our decisions now, and not just in the context of game theory and repeated games. In fact, we've seen it play out in a different context this past week, as reported by the New Zealand Herald:

Kiwis are rushing to fill up their cars across the country amid fears of price increases at the pump because of escalating conflict in the Middle East.

Video sent to the Herald of Waitomo Tinakori petrol station in Wellington today showed a queue of cars waiting for fuel, with vehicles spilling out on to the road.

Waitomo Group CEO Simon Parham said there has been a similar increase in demand at stations across the country, with sales increasing by 10-15% this week.

“People are filling up and filling their cars ahead of the price increase that will flow through the market over the coming weeks because of the Iran conflict,” he said.

To see what is going on here, let's consider the retail market for petrol, as shown in the diagram below. Before the current conflict in the Middle East, the equilibrium price of petrol was P0, and Q0 petrol was traded per week. Then the conflict begins. Consumers anticipate that the price of petrol will increase in the future, so they decide to fill up their vehicles now. That increases the demand for petrol from D0 to D1. The equilibrium price of petrol increases to P1, and there is Q1 petrol traded in the week. 

Notice that by trying to avoid the high petrol price in the future, the consumers cause the price to rise today, which is exactly the outcome they were trying to avoid! In effect, when consumers rush to fill up early, they bring some of the future price pressure forward into the present. Expectations about future prices can cause self-fulfilling prophecies like this, which is a point I will make in my ECONS101 class in several weeks, when we talk about financial markets (where self-fulfilling prophecies are a clear and present danger at all times). The shadow of the future matters - consumers' actions based on trying to avoid future price rises make those price rises happen now instead.

Declining migrant rights in Europe shows Milanovic's model of migration flows and migrants' rights in action

The Financial Times reported earlier this week (paywalled):

Immigration has become more controversial since shifting from predominantly white European to predominantly non-white, non-European — mostly Asian in the UK, mostly African in France. These trends will continue: Africa’s population is forecast to jump from 1.5 billion today to 2.5 billion by 2050, while Europe’s working-age population craters...

How can politicians square the circle of needing immigrants but not wanting them? By posturing against the most visible forms of immigration (small boats on the Channel or the Med, and asylum-seekers) while quietly letting in more workers. Britain’s vote for Brexit was largely driven by anti-immigration feeling, but immigration to the UK has soared since then. Italy’s rightwing leader Giorgia Meloni makes a show of trying to process asylum-seekers in Albania — reflecting a widespread European desire to offshore asylum — while also issuing nearly a million non-EU work visas. The French parliament voted through a strict immigration law in 2023, yet in 2024 immigration jumped.

Branko Milanovic's model of migration flows and migrants' rights, which was explained in his book Capitalism, Alone (which I reviewed here) and which I expanded on in this earlier post can be used to explain these changes. Over time, Europeans have become willing to accept lower migration flows for a given amount of migration rights. In the model, this equates to a decrease in the demand for migrants (the demand in this model represents the public tolerance for migrants). This situation is shown in the diagram below. Initially, the equilibrium level of migrant rights R0 was associated with migration flows to Europe of M0. Then, as Europeans' demand for migrants decreases, the 'demand curve' shifts to the left, from D0 to D1. The equilibrium now occurs where the new curve D1 intersects with the supply curve S0, with lower migration flows (M1) and lower migrant rights (R1).

As the Financial Times article notes, migrant rights are eroding:

The new trend, as seen for instance in the UK, is to give immigrants time-limited visas for specific job sectors, reduce their right to bring family members, and make them wait longer — decades, in some cases — before they can get permanent settlement. In France, the far-right Rassemblement National party, the likely next government, wants to scrap birthright citizenship, meaning that people could spend their lives in the country while forever remaining second-class outsiders.

Milanovic's model helps us to explain how changes in Europeans' preferences for migrants translate into both lower migration flows and lower migrant rights. To improve migrants' rights, the process would likely have to happen in reverse, with Europeans returning to a more welcoming state.

Read more:

• Milanovic's model of migration flows and migrants' rights, expanded

Milanovic's model of migration flows and migrants' rights, expanded

In my review of Branko Milanovic's book Capitalism, Alone yesterday, I noted that there were a couple of missed opportunities for the book to go deeper on certain topics. One of those was a simple model of migration flows and migrants' rights, presented in Chapter 4 of the book. Milanovic motivates this model with a discussion of the native-born population's view on migrants, based on the following proposition (emphasis is from the book):

...The native population is more likely to accept migrants the less likely the migrants are to permanently remain in the country and use all the benefits of citizenship.
This proposition introduces a negative relationship between (i) willingness to accept migrants and (ii) extension of migrants' rights...

Milanovic then goes on to illustrate this relationship with a simple diagram, noting that:

...it seems reasonable to believe that there is a kind of demand curve for migrants, where the demand is less when the cost of migrants, in terms of the rights and sharing of the citizenship premium they can claim, is greater.

This 'demand curve' relationship that Milanovic describes is shown in the diagram below (by the line D). Milanovic distinguishes between two cases, represented by two points on the demand curve in the diagram: (1) high on the curve (at point A), where migrants have extensive rights, but the native-born population would desire very few migrants; and (2) low on the curve (at point B), where migrants have few rights, and the native-born population are willing to accept more migrants.

However, here is where Milanovic misses an opportunity. Yes, there may be such a demand curve for migrant flows. However, there is also a corresponding supply curve, constructed from the decisions of the potential migrants themselves. Ceteris paribus (holding all else constant), migrants would desire to go to destinations where they would have greater citizenship rights. In other words, the supply of migrants in this model is upward sloping, as shown in the diagram below (by the line S).

Now consider Milanovic's two cases. The first case, where migrants are offered extensive rights, is illustrated in the diagram below. Consider migrant rights of R1. The native-born population desires very few migrants (MD1), but the number of migrants who want to migrate to such an attractive destination is high (MS1). There will be conflict. There is an excess supply of migrants (the difference between MD1 and MS1). The native-born population feels like they are being overwhelmed by migrants who are taking advantage of the rights of citizenship that they have not 'earned'. The native-born population agitates, and the government relents, eventually by offering fewer citizenship rights to migrants. This continues until rights reach R0. This is the equilibrium amount of citizenship rights. The equilibrium migration flow is M0.

Now consider Milanovic's second case, where migrants are offered few rights, which is illustrated in the diagram below. Consider migrant rights of R2. The native-born population is willing to accept many migrants (MD2), but the number of migrants who want to migrate to such an unattractive destination is low (MS2). There will be few migrants, and the economy may suffer as a result. There is an excess demand for migrants (the difference between MS2 and MD2). The government wants to attract more migrants, so they begin to offer migrants more rights. This continues until rights reach R0. This is the equilibrium amount of citizenship rights. The equilibrium migration flow is again M0.

Having established equilibrium migrant rights and migration flows, we can now use the model in much the same way as the standard model of demand and supply. Consider some exercises in comparative statics (the movement from one equilibrium to another). If there is an exogenous increase in the supply of migrants, such that more migrants are willing to migrate at each and every level of rights, then the supply curve shifts to the right. The equilibrium level of migrant rights will fall. If populist rhetoric reduces the willingness of the native-born population to accept migrants, then the demand curve shifts to the left. The equilibrium level of migrant rights will fall. And so on.

Obviously, the model is not a perfect description of the relationship between migrant rights and migration flows. However, Milanovic could easily have built up this model (as I have done above) and used it more extensively to explore the relationship here. By ignoring the role that migrants' choices play (the supply curve in the model above), Milanovic suggests that only the demand curve matters. That is, that only the choices of the native-born population will affect migration. Clearly, that is an incomplete description. The level of citizenship rights that migrants receive will depend on government actions, and the forces (upward or downward) that impact those actions depend on both the native-born population and the migrants.

Even this post has, I think, barely scratched the surface of the utility of a model like this, to understand the politics of migration flows and migrants' rights. I'm sure that there is much more that can be done with this.

Sellers of natural diamonds are in trouble

The Financial Times reported earlier this year (paywalled):

Over 70 per cent of the world’s lab-grown diamonds for jewellery — many destined for the ring fingers of newly engaged couples — originate in a Chinese factory, with Henan at the centre of the synthetic trade...

For the natural diamond industry, Feng’s factories and others like them have been devastating. The explosion of lab-grown diamonds on the international jewellery market has coincided with a slump in demand, sending the price of smaller natural diamonds to their lowest levels in a decade.

Marty Hurwitz, head of the Grown Diamond Trade Organisation, says lab-grown diamonds have “been a massive disruption. People in the industry at first didn’t believe it and, second, couldn’t accept it.

“This has been the first competitive product that mined diamonds have ever faced.”

To see the impact of the growth of the lab-grown diamond market on natural diamonds, let's first consider the market for lab-grown diamonds, shown in the diagram below. The 'explosion of lab-grown diamonds' is demonstrated by the increase in the supply, from SA to SB. The equilibrium price of lab-grown diamonds has decreased from PA to PB, and the equilibrium quantity of lab-grown diamonds traded has increased from QA to QB.

Next, consider the effect on the market for natural diamonds, shown below. Lab-grown diamonds and natural diamonds are close substitutes (so close that no regular consumer can tell them apart!), and lab-grown diamonds are now cheaper. So, as the quote from the Financial Times article notes, the demand for natural diamonds has decreased, from D0 to D1. The equilibrium price of natural diamonds has decreased from P0 to P1, and the equilibrium quantity of lab-grown diamonds traded has decreased from Q0 to Q1.

This is a real problem for the producers of natural diamonds. The product that they are selling is decreasing in price, and they are selling a smaller quantity. That must make those sellers worse off. And, to make matters worse, they should have seen this coming. I wrote this post back in 2019, wondering why De Beers wasn't investing in its own production facilities for lab-grown diamonds. It turns out that they were, as the Financial Times article notes:

In 2018, De Beers established its own lab-grown diamond company, Lightbox, which started churning out cheap synthetic stones. Part of the thinking was to create a bifurcated market that would ensure the luxury appeal of expensive natural stones was maintained while undercutting synthetic rivals. 

Instead, it sparked a price war that also dragged down the price of natural diamonds, which were simultaneously hit by a slump in demand due to lower marriage rates during the pandemic. By the end of 2024, De Beers had amassed an inventory of unsold diamonds worth $2bn, the largest stockpile since the 2008 financial crisis.

Again, that outcome could and should have been anticipated. De Beers (and other natural diamond producers) need to find some way of differentiating natural diamonds from lab-grown diamonds (I will return to this point in a future post). Otherwise, the natural diamond sellers are in real trouble.

Read more:

• Market power and disruption in the diamond industry

Your matcha fix is going to cost you more

The New Zealand Herald reported last month:

At a minimalist Los Angeles matcha bar, powdered Japanese tea is prepared with precision, despite a global shortage driven by the bright green drink’s social media stardom.

Of the 25 types of matcha on the menu at Kettl Tea, which opened on Hollywood Boulevard this year, all but four were out of stock, the shop’s founder Zach Mangan told AFP.

“One of the things we struggle with is telling customers that, unfortunately, we don’t have” what they want, he said.

With its deep grassy aroma, intense colour and pick-me-up effects, the popularity of matcha “has grown just exponentially over the last decade, but much more so in the last two to three years”, the 40-year-old explained.

It is now “a cultural touchpoint in the Western world” - found everywhere from ice cream flavour boards to Starbucks.

This has caused matcha’s market to nearly double over a year, Mangan said.

“No matter what we try, there’s just not more to buy.”

Thousands of kilometres away in Sayama, northwest of Tokyo, Masahiro Okutomi - the 15th generation to run his family’s tea business - is overwhelmed by demand.

“I had to put on our website that we are not accepting any more matcha orders,” he said.

Producing the powder is an intensive process: the leaves, called “tencha”, are shaded for several weeks before harvest, to concentrate the taste and nutrients.

They are then carefully deveined by hand, dried and finely ground in a machine...

“It takes years of training” to make matcha properly, Okutomi said. “It’s a long-term endeavour requiring equipment, labour, and investment.”

What has happened in the market for matcha is explained in the diagram below. The market started at equilibrium, where the supply curve S0 met the demand curve D0. The equilibrium price of matcha was P0, and the quantity of matcha traded was Q0. Demand increases to D1. If prices don't adjust and remain at the original price of P0, then the quantity of matcha supplied remains at Q0, but the quantity of matcha demanded increases to QD. There will be a shortage of matcha.

However, when there is a shortage the market will eventually adjust, and the price will increase to the new equilibrium price of P1 (where the supply curve S0 meets the new demand curve D1), while the quantity of matcha traded increases to Q1. But notice that, even if the market adjusts to a new equilibrium, the quantity of matcha increases only slightly. That's because the supply curve is very inelastic (very steep). That's because the matcha producers cannot adjust quickly to the change in price by producing more - it takes a lot of time to add productive capacity in matcha.

Finally, the price of matcha drinks is also going to increase. To see why, consider the market for matcha drinks, shown below. The market was initially in equilibrium, where demand D0 meets supply S0, with a price of P0 and a quantity of matcha drinks traded of Q0. The cost of matcha increases, so tea sellers face higher costs of production. This decreases the supply of matcha drinks to S1. This increases the equilibrium price of matcha drinks to P1, and reduces the quantity of matcha drinks traded to Q1.

Be prepared to pay more for your favourite matcha drinks.

The increase in methamphetamine use in New Zealand has been driven more by supply than demand

The New Zealand Herald reported last month:

Prime Minister Christopher Luxon has asked his justice and police ministers to look at what more can be done to tackle methamphetamine use in New Zealand, which has nearly doubled in two years.

Police data shows an “unprecedented 96% increase in meth consumption when compared to 2023, with consumption increasing across all sites”...

The police report said the spike in methamphetamine use likely resulted from an increase in both supply and demand, along with a decrease in street-level pricing.

The changes in the market for methamphetamine described in the Police report are illustrated in the diagram below. In 2023, the market operated in equilibrium where the demand curve D0 intersects the supply curve S0. The equilibrium price (the street price of methamphetamine) was P0 and the equilibrium quantity of methamphetamine traded (and consumed) was Q0. Between 2023 and 2025, there was an increase in supply of methamphetamine (from S0 to S1) and an increase in demand for methamphetamine (from D0 to D1). The equilibrium quantity of methamphetamine consumed increased from Q0 to Q1 (an "unprecedented 96% increase" according to the article). The equilibrium price of methamphetamine decreased from P0 to P1 (a "decrease in street-level pricing: according to the article).

Ordinarily, when we see an increase in both supply and demand in a market, the increase in the equilibrium quantity is certain, but the change in equilibrium price is ambiguous. That's because an increase in demand causes an increase in the equilibrium price (ceteris paribus), while an increase in supply causes a decrease in the equilibrium price (ceteris paribus). In this case, the decrease in the street-level (equilibrium) price of methamphetamine tells us that the increase in supply of methamphetamine must have been larger than the increase in the demand for methamphetamine. So, the increase in methamphetamine use has been caused by both increases, but the supply side of the market is having a larger effect than the demand side.

Now, that doesn't mean that police should be targeting the supply side of the market. As I noted in this 2016 post, in the long run it is likely to be more effective to focus on the demand side, rather than the supply side, to reduce drug use. And that's what we should see now.

Read more:

• Police are not winning the P war - they need to focus on demand
• Evidence that the supply of methamphetamine is increasing
• The coronavirus lockdown and the New Zealand market for illegal drugs

Sweet treats are going to cost a bit more

The New Zealand Herald reported earlier this week:

Chocolate prices could be set to rise further as the cost of cocoa keeps pressure on...

Chocolate manufacturer Whittaker’s said in a statement that there had been “significant ongoing cost escalation of cocoa” driven by supply constraints.

It said there would be an impact on the future price of all chocolate.

The supply constraints for chocolate are being caused by "aging cocoa trees, diseases, and fluctuating weather patterns", which have reduced cocoa yields. The effects of reduced cocoa yields on the markets for cocoa and chocolate can be easily analysed using the supply and demand model that my ECONS101 class covered a few weeks ago. This is shown in the diagram below. Think about the market for cocoa first. The market was initially in equilibrium, where demand D0 meets supply S0, with a price of P0 and a quantity of cocoa traded of Q0. Poor yields reduce the cocoa harvest, decreasing supply to S1. This increases the equilibrium price of cocoa to P1, and reduces the quantity of cocoa traded to Q1.

Now consider the market for chocolate. The costs of producing chocolate have increased. That leads to a decrease in the supply of chocolate. The diagram for the market for chocolate is the same as that for cocoa, with the equilibrium price increasing, and the quantity of chocolate traded decreasing.

From the consumer's perspective, this means that chocolate is now more expensive. Some consumers will start to look for alternative sweet treats. What will happen in the market for those other sweet treats. That is shown in the diagram below. Since the price of chocolate has increased, other sweet treats are now relatively cheaper than chocolate, so some consumers will switch to other sweet treats. The effect on the market for other sweet treats is shown in the diagram below, where the market is initially in equilibrium with a price of PA, and a quantity of other sweet treats traded of QA. This increases the demand for other sweet treats from DA to DB, increasing the equilibrium price of other sweet treats from PA to PB, and increasing the quantity of other sweet treats traded from QA to QB.

So, it seems that consumers can't avoid higher prices by switching to other sweet treats, because higher price chocolate is likely to lead to higher prices for other sweet treats as well.

Finally, let me address this quote from Brad Olsen from the New Zealand Herald article:

“It might be more difficult for chocolate to increase in price, being a “nice to have” rather than a necessity as households are more careful with their money but chocolate for households is the necessary luxury so willingness to buy chocolate might remain pretty high despite higher prices.”

I guess this is the sort of quote you get from an economist who is caught on the hop by a journalist's question that they were not well prepared for. If chocolate is a luxury good, then ceteris paribus (holding everything else equal), it will tend to have more elastic demand. That means that consumers are more responsive to a change in price than for other goods that are necessities rather than luxuries. Of course, being a luxury is only one of many factors that determine how responsive consumers are to a change in price, and the other factors (like the number of substitute goods for chocolate, and the proportion of income that consumers spend on chocolate) will matter more. Nevertheless, a "necessary luxury" is not something that exists.