Recently there has be a drive to increase the production of alternative fuels fr
ID: 1167903 • Letter: R
Question
Recently there has be a drive to increase the production of alternative fuels from corn. The argument used by many is energy self sufficiency. In light of the desire to reduce our use of foreign produced oil, many have suggested we should subsidize this production and shift to alternative fuels. Is this a good or bad idea from and economic view? If you say “Yes” or “No”, explain your answer using sound economic theory. Recently there has be a drive to increase the production of alternative fuels from corn. The argument used by many is energy self sufficiency. In light of the desire to reduce our use of foreign produced oil, many have suggested we should subsidize this production and shift to alternative fuels. Is this a good or bad idea from and economic view? If you say “Yes” or “No”, explain your answer using sound economic theory. Recently there has be a drive to increase the production of alternative fuels from corn. The argument used by many is energy self sufficiency. In light of the desire to reduce our use of foreign produced oil, many have suggested we should subsidize this production and shift to alternative fuels. Is this a good or bad idea from and economic view? If you say “Yes” or “No”, explain your answer using sound economic theory.Explanation / Answer
From the economic point of view there are several pros and several cons of the drive and its subsidization. But Overall, the negatives seem to outweigh the positives.
In an article a few years ago from business week it outlined the costs of ethanol. It’s subsidized by the U.S. government at a rate of 51 cents per gallon, and federal and state subsidies for the fuel added up to $6 billion last year (Herbst 2007). Then ofcourse we have the rise in the price of corn, which boosts food prices. In being self sufficient by subsidizatio we may end up general price hike in food products that may also effect other gooods. Already, about 20% of the corn crop goes toward ethanol production that drove up corn prices 80% in 2006 alone. Think of all the mechanization and energy needed to harvest the corn. We use equipment that runs on gasoline which of course is counterproductive to the end result we desire with ethanol usage.
Now on the positive side the ethanol industry plays a crucial role for midwest farm regions. The higher corn prices are economically helping depressed rural areas and new ethanol manufacturing plants bring jobs to areas that have higher unemployment .As a reaction to the higher corn prices we will see an increasein food prices.Economically this changes the budget constraints and consumer equilibrium when it comes to the purchase of normal goods. The higher costs of food and the higher costs of using ethanol removes income that can be utilized on other normal goods.This whole scenario lines right up with the increase in wages interms of effects on consumer income, budget constraints, and demand fornormal and inferior goods.
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