Sometimes a great idea comes along that seems to hold the potential for solving a host...

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Sometimes a great idea comes along that seems to hold the potential for solving a host of problems. The idea receives publicity, is promoted as being the golden key and everyone jumps on the bandwagon. Economists may be part of the problem in that some do take a narrow view of a problem and support solutions that they happen to agree with or that their research tells them has some benefit. However, economists will also tell you that any benefit has some costs attached to it and it is important to look at those costs carefully to assess the true worth of the 'solution. In economics, markets are highly dependent on one another; if circumstances change in one market they will affect other markets - and the people who both use and rely on them. Take the case of biofuels. The development of biofuels has been heralded as an opportunity to reduce the reliance on oil, to accelerate the change to renewable energy and to provide a cheaper alternative to oil. Biofuels use crops - often cereal crops - to produce biofuel. The very word 'biofuel' gives the impression that it is somehow 'good' through the use of the term 'bio'. However, it seems that not everyone is quite so happy that biofuels are a 'good' thing. The charity, Oxfam, has been running a campaign which presents a damning picture of the impact that the move to biofuels is having on the most vulnerable people in the world. The production of biofuel has been partly responsible for increases in basic commodity prices like wheat in recent years. The demand for the raw materials for biofuels has encouraged farmers to switch from production of some crops to others. The resulting output has been diverted between crops going for food and for production of ethanol. The result, say Oxfam, has resulted in an increase in the number of people in poverty, worldwide, of some 30 million and costing poor countries an extra $100 billion in food bills. One of the reasons, says Oxfam, is a shortage of crops (exacerbated by the disruption to supply as a result of bad weather and natural disasters), which has forced food prices much higher. The people who are most affected by these higher prices are the people who are poorest and on the margins of poverty. As food prices rise, these marginal people are dragged into poverty. Oxfam says that the value to farmers of growing crops for biofuel is higher than that for growing it for food. As a result farmers are diverting production to fuel and this reduces the supply of crops available for food production. The situation is made worse by the subsidies and tax breaks that rich countries have given to encourage the growth in the production and use of biofuel. In addition, the change in land use that is being driven by the move to biofuel is actually adding to carbon emissions, offsetting the environmental benefits of using renewable fuel rather than oil based fuels. Oxfam suggests that the target that the EU has set for the production of biofuel will lead to carbon emissions rising 70 times by 2020. The largest producer of bioethanol in Europe, Abengoa Bioenergy, has reacted angrily to the claims and has branded the suggestion that the production of bioethanol can lead to world poverty and extreme hunger as a 'manipulation' and as being 'false statements'. It suggests that production of bioethanol benefits local economies, redistributes global income, creates jobs, and increases incomes. There is enough land in the world to make production of cereal-based bioethanol sustainable, it says. In addition, it points out that in future, cereal-based bioethanol production will be outstripped by ethanol produced from biomass. So, where does the truth lie and where should our priorities lie in the production of this type fuel? Questions In what way is the market for cereals, for food and for biofuel 'interdependent? What factors might influence the decisions of farmers about whether to supply cereal crops for the food or the biofuel industries? Use supply and demand diagrams to show how the growth in biofuels has led to a rise in commodity prices. Why might Oxfam believe the switch from biofuels has caused a rise in poverty? Do you agree with the views of Abengoa Bioenergy that the long-term benefits of biofuel will out-weigh any short-term costs? Sometimes a great idea comes along that seems to hold the potential for solving a host of problems. The idea receives publicity, is promoted as being the golden key and everyone jumps on the bandwagon. Economists may be part of the problem in that some do take a narrow view of a problem and support solutions that they happen to agree with or that their research tells them has some benefit. However, economists will also tell you that any benefit has some costs attached to it and it is important to look at those costs carefully to assess the true worth of the 'solution. In economics, markets are highly dependent on one another; if circumstances change in one market they will affect other markets - and the people who both use and rely on them. Take the case of biofuels. The development of biofuels has been heralded as an opportunity to reduce the reliance on oil, to accelerate the change to renewable energy and to provide a cheaper alternative to oil. Biofuels use crops - often cereal crops - to produce biofuel. The very word 'biofuel' gives the impression that it is somehow 'good' through the use of the term 'bio'. However, it seems that not everyone is quite so happy that biofuels are a 'good' thing. The charity, Oxfam, has been running a campaign which presents a damning picture of the impact that the move to biofuels is having on the most vulnerable people in the world. The production of biofuel has been partly responsible for increases in basic commodity prices like wheat in recent years. The demand for the raw materials for biofuels has encouraged farmers to switch from production of some crops to others. The resulting output has been diverted between crops going for food and for production of ethanol. The result, say Oxfam, has resulted in an increase in the number of people in poverty, worldwide, of some 30 million and costing poor countries an extra $100 billion in food bills. One of the reasons, says Oxfam, is a shortage of crops (exacerbated by the disruption to supply as a result of bad weather and natural disasters), which has forced food prices much higher. The people who are most affected by these higher prices are the people who are poorest and on the margins of poverty. As food prices rise, these marginal people are dragged into poverty. Oxfam says that the value to farmers of growing crops for biofuel is higher than that for growing it for food. As a result farmers are diverting production to fuel and this reduces the supply of crops available for food production. The situation is made worse by the subsidies and tax breaks that rich countries have given to encourage the growth in the production and use of biofuel. In addition, the change in land use that is being driven by the move to biofuel is actually adding to carbon emissions, offsetting the environmental benefits of using renewable fuel rather than oil based fuels. Oxfam suggests that the target that the EU has set for the production of biofuel will lead to carbon emissions rising 70 times by 2020. The largest producer of bioethanol in Europe, Abengoa Bioenergy, has reacted angrily to the claims and has branded the suggestion that the production of bioethanol can lead to world poverty and extreme hunger as a 'manipulation' and as being 'false statements'. It suggests that production of bioethanol benefits local economies, redistributes global income, creates jobs, and increases incomes. There is enough land in the world to make production of cereal-based bioethanol sustainable, it says. In addition, it points out that in future, cereal-based bioethanol production will be outstripped by ethanol produced from biomass. So, where does the truth lie and where should our priorities lie in the production of this type fuel? Questions In what way is the market for cereals, for food and for biofuel 'interdependent? What factors might influence the decisions of farmers about whether to supply cereal crops for the food or the biofuel industries? Use supply and demand diagrams to show how the growth in biofuels has led to a rise in commodity prices. Why might Oxfam believe the switch from biofuels has caused a rise in poverty? Do you agree with the views of Abengoa Bioenergy that the long-term benefits of biofuel will out-weigh any short-term costs?

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1 The market for cereals is interdependent because the same crops are often used for both food and biofuel production As demand for biofuels increases more crops may be diverted from food production t... View the full answer