Last updated on 10.07.2020
The production of milk by the dairy farming sector is an example of a production function where inputs (e.g. land, buildings, machinery, livestock, feed) through the physical transformation process results in milk (output). This relationship however is impaired by the incursion of diseases most commonly mastitis and lameness which often results in reduced milk yield (output loss).
Disease in this context acts as a negative input and causes the production function curve for milk to shift downwards such that cows with either mastitis or lameness produce less milk for given inputs compared to healthy cows. This relationship illustrates the concept of efficiency loss as it becomes evident that the allocation of available scarce resources produces less output (milk) in the presence of diseases, making society worse-off. To restore the balance requires the application of basic economic principles to aid decision making in allocating scarce resources to diseases control amidst competing alternatives as can be applied in the context of the above statement by the senior veterinarian.
To make the best choice on which disease between mastitis and lameness to control in order to shift the milk production function curve upward (and the marginal cost curve to the right) is not a straightforward decision, at least to the veterinarian. This requires answers to the fundamental questions of; what is the cost (impact) of the disease on society and of what benefit will controlling it be to society. This in turn requires the application of methods ranging from welfare economics analysis to benefit-cost analysis, the latter being the most used approach.
Regardless of the method of disease cost estimation however, none is able to quantify in totality the cost of disease since this varies greatly depending on the context. That said, a decision to control mastitis based on the assumption that its costs is directly proportional to its economic importance and/or losses potentially constitutes irrational resource allocation and hence offers no guidance in making economic decisions. In rational economic decision making the single most important consideration is the idea that the marginal benefits of the favored choice must equal the marginal costs of rolling out the policy.
In the context of mastitis versus lameness control
In the context of mastitis versus lameness control, a rational choice between the two then would be the disease whose control results in increased milk output sufficient enough to cover the cost of additional resources allocated. That is to say, regardless of whether mastitis or lameness is controlled, the resultant benefit of increased milk yield for societal benefit should impose no additional cost. This approach is illustrated by the “loss-expenditure” frontier curve which applies the basic economic principle of marginal analysis to determine an optimal disease control strategy. Defining the “loss-expenditure” frontier, McInerney et al., explained that the total economic cost of disease, (C) is the sum of all output losses, (L) and control expenditures, (E). In the context of mastitis or lameness control output loss could be direct (e.g. discarded unwholesome milk) or indirect resulting from unrealized production (e.g reduced milk yield).
Control expenditure on the other hand directly relates to therapeutic or prophylactic interventions purported to mitigate mastitis or lameness. Exploring the general non-linear relationship between output loss and control expenditure for a particular disease, the law of diminishing marginal returns is reflected. This gives for every point on the loss-expenditure frontier curve the lowest disease losses attained for any value of control expenditure.
Description figure 1.0
Figure 1.0: The relationship between output losses, L (loss in milk production), and control expenditure, E (expenditure costs either of lameness, A or mastitis, B).
Figure 1.0 Illustrates the loss-expenditure relationship for lameness (A) and mastitis (B) control. The graph is a plot of output losses in £ against control expenditure also in £. From the graph control expenditure for lameness, (A) is EA and expenditure for mastitis (B) is EB. These result in reduced output losses (recovered milk yield) equivalent to LA and LB respectively (Thrusfield and Christley 2018). Deciding between lameness control or mastitis control, it must be recognized from the graph that switching from lameness control from point A on the curve to mastitis control at point B would result in an increase in control expenditure of dE = EB-EA, and a decrease in output losses of dL = LA-LB. Based on this, and considering that dL (recovered milk output) is greater in monetary value than dE (control expenditure), it would be completely rational to allocate resources to mastitis control.
That said, however, due to the effect of the law of diminishing marginal returns, it becomes increasingly expensive to achieve incremental reductions in output losses for any additional expenses made. For this reason, an optimal control point (loss/expenditure combination) that imposes no additional cost must be chosen. Having decided based on the trade-off between the reduction in output losses obtained by each control strategy (either mastitis or lameness) given by Figure 1.0, an optimal disease control strategy then would be the best combination of expenditure and reduction in output loss gained.
Description figure 2.0
This must be the point, C on the “loss-expenditure frontier” in Figure 2.0 where no avoidable costs remain for a given expense made. From Figure 2.0, the total cost at point C, TC = (LC + EC) is the lowest that can be achieved where no avoidable cost exists. Invariably, to the left of C, every pound of expense made reduces output losses by more than a pound and to the right of C, every pound of expense result in output losses reduced by less than a pound (Thrusfield and Christley 2018). Point C then could be referred to as the point of equilibrium. This approach presents the best way to make an economic decision on disease control strategies and not based on just the estimated magnitude as the senior veterinarian had remarked.