Your Daily Brew: The Tale of Your Daily Cup

Hey there, coffee aficionado! Are you one of the many university students who kick-start their day with a steaming cup of joe? Well, if you are, you’re not alone. You wake up to the enticing aroma of freshly brewed coffee wafting through your dorm. It’s a ritual, a daily necessity that starts your day and keeps you going through those early-morning lectures and late-night study sessions.

Every morning, you stand in line at your go-to cafe, eagerly anticipating that caffeine fix. Little do you know, there’s more than meets the eye in your Java journey! A world of economic intricacies swirling around that comforting cup that shapes your morning routine. As you sip your steaming latte, you unwittingly participate in a global economic dance fraught with externalities, social welfare dilemmas, and public good conundrums.

While you’re enjoying your brew, imperceptible costs known as externalities cast a shadow over your steaming cup of joe. Externalities are like the unintended ripples caused by tossing a pebble into a pond. In economic terms, these are the fortuitous consequences of economic activities that affect parties who aren’t directly involved in the transaction. While you enjoy your latte, ever thought about the environmental toll of coffee production?

The cultivation of coffee beans requires lands with rich biodiversity, such as tropical rainforests. But, with the increasing world demand for coffee, the expansion of coffee plantations has led to deforestation, habitat destruction and loss of biodiversity. Not to mention the use of pesticides and fertilisers which can pollute water sources and harm local ecosystems. With global coffee production now increasing to 168.2 million bags in the year 2022/23, these externalities are now amplifying in significance and size.

Yet, it’s not just the environment that bears the burden. Spare a thought for the coffee farmers behind your morning brew. Many of them work under challenging conditions, facing low wages, precarious working conditions, and fluctuating market prices. In fact, according to Fairtrade, smallholder farmers produce 60% of the world’s coffee yet nearly half are struggling to meet their ends causing them to grapple with the perpetuating cycle of poverty. These are the significant social costs associated with coffee production, yet they are often obscured from view as you enjoy your morning pick-me-up, casting a shadow over the industry’s conscience and are the hidden price tags attached to your daily caffeine fix. Does the satisfaction you derive from your morning ritual outweigh the broader societal costs of coffee production?

Negative externalities, such as social inequality and environmental deterioration, can weaken social welfare if not addressed, as seen in Figure 1. This occurs when the marginal social cost (MSC) exceeds the marginal private cost (MPC), implying that the use of agricultural chemicals provides private benefits to those who choose to use them while harming the environment. This leads to inefficiencies, including Pareto inefficiency which is an economic phrase that refers to allocating large amounts of finite resources to an activity that results in a negative externality.

This basically means there is room for improvement for all parties! In the example of coffee production, the pursuit of profit, divorced from social and environmental considerations exacts a toll on the common good by perpetuating a cycle of exploitation and environmental degradation.

Figure 1

So, where does your coffee fit into all of this? Well, think of it as a public good. Public goods are like the air we breathe – available to everyone and do not diminish its availability by one person’s consumption. A classic example of a public good is national defence, which the UK government spends a hefty £54.2b on in 2023/24 4 . Regardless of whether you contributed to its provision through taxes or not, you will nonetheless benefit from what it offers.

But how does your morning coffee relate to public goods? Well, consider the role of infrastructure in the coffee industry. From roads and ports for transportation to research and development for crop improvement, various forms of infrastructure support coffee production and distribution. However, the provision of public goods poses challenges, notably the free-rider problem, as individuals seek to benefit without contributing by not investing in sustainable practices, supporting fair-trade initiatives, or neglecting the welfare of coffee farmers.

So, what can you do to navigate these economic waters and steer towards a more equitable future for coffee? As a consumer, the most you can do is to promote transparency and fair-trade practices. You can demand sustainable coffee and support an equitable supply chain. However, bridging the gap between awareness and action remains a formidable task, underscoring the need for targeted marketing and market signalling strategies. There is a need to create a market environment that supports sustainable consumption such as advertising eco-friendly products that foster a positive change.

Moreover, utilising economics may hold the key to internalising externalities and incentivising sustainable practices. For example, Pigouvian taxes (tax per unit of pollution generated) can be used to reduce harmful output. Another solution is related to Coasian bargaining, which is the idea that if parties can negotiate to correct a negative externality essentially free of cost, then the externality can be internalised. In short, one party can ‘ bribe’ the other to stop a harmful action.

For example, you may offer to buy headphones for your house mate who plays their music very loud on their speaker every night! Yet, challenges are abound, from implementation hurdles and expensive transaction costs to power imbalances within the supply chain and ambiguity over property rights (AKA who is at fault and who is affected?).

So, as you enjoy that next cup, keep in mind the impact of your choices. Opt for fair-trade beans—they're your way of saying that social and environmental responsibility isn't negotiable.

You're delving into more than just a simple caffeine boost. It's a glimpse into the intricate world of economics. By grasping the hidden expenses and wider implications of coffee production, you can push for a fairer and more sustainable industry.

References

1. Coste, R. and Myhrvold, N. (2024). Coffee production , Encyclopedia Britannica . Encyclopædia Britannica, inc. [Online]. Available at: https://www.britannica.com/topic/coffee-production (Accessed: 18 April 2024).

2. International Coffee Organization. (2023). COFFEE REPORT AND OUTLOOK . https://icocoffee.org/documents/cy2023-24/Coffee_Report_and_Outlook_December_2023_ICO.pdf

3. Ministry of Defence. (2024). UK Defence in Numbers 2023. https://assets.publishing.service.gov.uk/media/660d4b5197e60600112b2218/MOD_Defence_in_Numbers_2023.pdf

4. Realistic and fair prices for coffee farmers are a non-negotiable for the future of Coffee . (2023). Fairtrade International . [Online]. Available at: https://www.fairtrade.net/news/realistic-and-fair-prices-for-coffee-farmers-are-a-nonnegotiable-for-the-future-of-coffee (Accessed: 18 April 2024).

5. Takahashi, R. (2021). Who is attracted to purchase green products through information provision: A nationwide social experiment to promote eco-friendly coffee. Environmental Science and Policy , 124 , 593–603. https://doi.org/10.1016/j.envsci.2021.08.006