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Food or Energy?

Apr 11, 2011 • Demand, Supply, and Markets, Developing Economies, Economic Debates, International Trade and Finance • 126 Views    No Comments

Biofuels create dilemmas. Whenever nations mandate converting corn or sugar into biofuel, their prices soar. People whose diets depend on these commodities are the first to suffer.

What to do? Lower food prices or increase energy conservation?

China’s answer was to ban using grains for its biofuel. Sort of like patching a leaky boat, the problem just shifted.  Now, the NY Times tells us that instead of grains, China is using cassava chips. A major Thai export, cassava chips have soared in price. Predictably, the millions in Africa for whom cassava is a dietary basic, face higher prices and shortages.

The Economic Lesson

Demand, supply and opportunity cost tell part of the story. Whenever demand shifts to the right for a commodity, the price increases. Then though, the supply side rethinks its planting decisions. The opportunity cost of remaining with a cheaper commodity becomes too high. As a result, growers have the incentive to switch their crops. Then, supply increases and price drops.

The other part of the story involves the role of government. Do you agree with government mandating energy sources?

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