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Thursday, March 29, 2007

Holy unintended consequences Batman!! Whoa... take a breath Robin lets have a look at this first...

This is a post about bio-fuels... and really just a beautiful thing if you ask me. The author of the article is telling us about an article that is telling us how the growing of bio-fuels is screwing up the crop markets in third world countries.

The reason as you might have guessed is that demand for bio-fuels is increasing the price is of course rising as well. As a result of this a rather unintended and possible disastrous consequence.... Farmers, and indeed other people of undeveloped countries are ceasing to provide food crops to the populace and are instead growing bio-fuel crops since they get more cash for these. So there are numerous problems here (according the the author). Like the farmers are no longer growing enough food, and the destruction of natural habitat to make room for switch grass or whatever they grow there.

So while there is no specific mention of the government requiring or restricting the growing of bio-fuels or requiring some sort of rule that is supposed to even things back out you can almost feel it right there around the corner waiting to be announced. The claim of externally is on the tip of the tongue and the cries for someone to lower the price of food with price ceilings and stop the evil farmers from making a living at the expense of the natural habitat. All of these regulations are certain to add all kinds of extra inefficiency to the market for these goods that there had better be a damn good reason to think that the government needs to be involved.

So what is at the root of this supposed problem that really needs to be fixed? Is there really any reason to think that this will not be corrected by the market?

The most obvious thing to me as an economics student is of course the fact that if the amount of food is driven too low then the prices for food will rise. Then of course farmers at the margin may decide they would be better off growing food instead of bio-fuels. Then eventually we reach equilibrium.

You would have too look way down into the comments on the link to find anyone with even a hint of this dynamic market adjustment. Everyone else is busy yacking about how the supposed costs of bio-fuel growing is still better than fossil fuels. Some of the commenters seems pretty well informed so it just goes to show how the science of economics has somehow escaped the majority of America. And of course it highlights how lame that really is.

Yes, it seems the issue you point us to involves externality abuse. Food or fuel, the relative values of each can be efficiently reflected in the market.

But, perhaps there is a larger context for this news article and this issue.

The idea is that the use of gasoline has an external cost which has not been internalized in market prices. Of course, we economists would take care of this with an appropriate tax (and of course there is already an excise tax which at least probably takes the proper form). Then we would say let the demands for food and alternative fuels fight for themselves in the market place.

Unfortunately, the larger context for the news article seems to me to be that the externality idea with respect to gasoline has also generated policy demands to subsidize bio-fuels. This policy response probably doesn't fit the efficiency concerns as well as the excise tax. Since some governments do seem to be subsizing bio-fuels, the competing demands for food and bio-fuel many not get us the efficiency result in the market. Not course, because of market failure per se. But, rather, because of the inefficiency choice of public policy to subsidize bio-fuel.
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