Impacts of Increased Demand for Biofuels - Essay Example

? Economic Impacts of increased demand for biofuels on the demand for and price of crops such as corn Bio fuels are the main, alternative energy source that is suitable for use in vehicles without necessitating technological changes. This has led to an increased demand for biofuels production. The increased demand for biofuels has leads to increased level of production. This leads to a higher demand of corn for biofuels production, animal feed and consumption. The three consuming sectors competing for the same product push the prices upwards (Dalton, 2009). The other consumers of corn have to resort to other alternatives that are relatively cheaper in the market. Biofuels are a product from corn and oilseeds; thus, the producers of biofuels have to substitute the input of the two raw materials for the optimization of profits. Thus, the producer faces the choices to incur a higher cost of production, reduce the output or increase the consumption of oilseed for production. The crop farmer benefits from higher returns and responds by increasing the production of corn (Dalton, 2009). The vertical axis shows the input of oilseed while the horizontal shows the corn input. The aim of the producing company is to maximize profit (Dalton, 2009). The point R we have the isocost line meeting with the isoquant. This combination of corn and oilseed will yield the company maximum output minimizing on cost which is the objective of the company. An increase in the demand of biofuels will mean that the company has to move to a higher output level. This will need an increase in the inputs, which are corn and oil seed. How developments in agricultural and conversion technology might influence the impacts identified in above The developments in agriculture aimed at production of more corn will lead to increase the supply of corn in the market. The increase in supply is likely to cause a decrease in the price of corn. However, with the advancing technologies of conversion coming into operation a wider range of materials will be usable for production of bio fuels (Bhamra et al., 2010). This will further, ease the burden of bio fuels production on corn. The price of corn would establish a new equilibrium with the demand that now will be. DI indicates the demand of corn. Pe and Qe show the equilibrium price and quantity. The production of biofuel using corn as a raw material causes an increase in the demand of corn, thus the demand curve shift shown by the arrows (Dalton, 2009). Consider the result below. The demand for more biofuels stimulates a higher demand for corn (Gupta & Ayhan, 2010). The demand curve shifts to D2 and a new equilibrium at the point J. The effects of increased competition between participants in the market on the impacts identified above. The competition will result to a higher demand of corn. The crop farmers will expand production in order to feed the new market. This will mean changes in the farming practices and patterns. These changes necessitate farmers to use irrigation. The use of irrigation will cause a strain on water resources available. There will be a need to expand to potion of land used in corn cultivation yet limited space provides a challenge. The crop farmers will start cultivating of marginal lands, which are highly erodible (Gupta & Ayhan, 2010). The farmers will intensify the use of chemical inputs to increase crop yield. This will negatively affect the soil. This is because the increased use of fertilizers will lead to contamination of runoff and nutrient leaching. However, the level of damage will depend on management practices employed by farmers. Increase the level of cultivation may lead to high levels of erosion. This will further, affect the quality of water in the region. These damages will be presenting the problems of environment sustainability (Gupta & Ayhan, 2010). Cultivation of marginal lands and expansion of land under crop production is a threat to wildlife resources. The cultivation leads to destruction and clearing of vegetation, which forms the habitat of wildlife. The contamination of water will adversely affect aquatic species. This will be a disturbing nature equilibrium, which will cause biodiversity loss. This demand for corn is causing a hike in the food prices (Gupta & Ayhan, 2010). The impact of an increase in the price of crops and a (proportionately smaller) decrease in the price of fuel on a low-income person who spends most of her income on food (derived from crops). Budget line This shows a budget line of a low-income earner. B2 shows the consumption before the increase of food price (Gupta & Ayhan, 2010). Good Y represents food while good X represents fuel. The consumer could consume equal quantities of both commodities as shown in the budget lineB2. There is an increase in the food price while the cost of fuel remains low. This consumer uses most of his income on food thus; he has to reduce the consumption of fuel. The budget line, B2, shift to B1 showing the effect of price increase on the consumer. The commodity affected by the change is the fuel (Bhamra et al., 2010). The income of the consumer has remained the same, but the marginal rate of substitution is different. Below, we consider the consumption that will yield the consumer maximum utility within the constraints of his budget using the budget line and an indifference curve. Utility Maximization curves. The above maps the point of utility maximization for this consumer affected by changes in the price of commodities. Initially the consumer was at the indifference L2, the point of utility maximization was K where the indifference curve meets with the budget line. The consumer shifted to a lower budget line and a lower indifference curve L2. This results to a shift in the rate of substitution and the change of the point of utility maximization to point J (Gupta & Ayhan, 2010). The income of the consumer is constant, given the changes happening in the market the consumer has to adjust the consumption pattern. This explains the choice that the consumer has taken, reducing fuel consumption. The consumer now pays less on fuel as the price has reduced. However, the price of food has gone up, and he pays more for food. Thus, the market changes have put him at a disadvantage. Analysis for a high-income person who spends a relatively small proportion of her income on food and commenting on the distributional consequences of the changes in the price levels Utility maximization (Bhamra et al., 2010) The above shows the interaction of the indifference curve and the budget line of a high-income person. We have representation of two indifference curves and two-budget line. The point of maximization of utility was initially at point A on the lower budget line and indifference curve. The price of food increase but the prices of fuel reduce. The increase in the prices of food and reduction of the cost of fuel makes the person to change his rate of commodity substitution. The person has a preference of more fuel than food (Inmaculada et al., 2011). The consumption of food increases marginally while fuel consumption of this individual increase highly. This causes a shift in the movement of the utility maximization point. The consumer moves to a higher utility level at C. The income of this person is constant, yet the change moves him to a higher level of utility (Bhamra et al., 2010). The change in the market is a cross cutting to all individuals. However, the effects are different to different consumer. The low-income consumer whose bigger potion of income is for food is moves to a lower utility level when food prices increase. The reduction in the price of fuel does not favor the person economically. The person whose consumption is largely on fuel moves to a higher utility level when the price of fuel reduces even with the increase in the food prices (Dalton, 2009). Identifying and discussing possible government policy responses There is a dire need for policies to regulate and govern the production bio fuels and the agricultural sector. This ensures proper handling of the challenges that the new developments may face. One of the issues that need policy attention is the increase in the food prices. This is because the market competition for corn has caused an increase in the food prices. The segment affected by this is the low-income earners. Introduction of market differentiation would be an appropriate policy measure to protect the interests of low-income earners. This will ensure that the rich who can afford it pay continue to pay the market price as the low-income earners enjoy reduced prices. The government should also put control on the acreages’ of land under corn production to ensure land be set aside for production of other food crops (Ball et al., 2010). The other concern is about environmental sustainability that incurs threats by the increased production of corn. The industries involved in the production process of biofuels should undertake research on environmental sustainability. The concerned parties should get involved in preservation of the environment. It is the role of the government to put in place these policies and follow up to have them implemented. This will ensure that we make the best of the resources that are there in the country (Ball et al., 2010). Bibliography "Analyzing economic structure and comparing the results of the predicted economic growth based on solow, fuzzy-logic and neural-fuzzy models." Technological & Economic Development Of Economy 17, no.1 (March 2011): 101-115. Ball, Eldon, Roberto Fanfani & Luciano Gutierrez. The economic impact of public support to agriculture: an international perspective. New York: Springer. 2010. Bhamra, Harjoat, Lars-Alexander Kuehn, and Ilya Strebulaev. "The Aggregate Dynamics of Capital Structure and Macroeconomic Risk." Review Of Financial Studies 23, no. 12 (December 2010): 4187-4241. Inmaculada Martinez-Zarzoso, et al. "Modelling the Dynamics of Market Shares in a Pooled Data Setting: Econometric and Empirical Issues." Applied Economics 43, no. 7-9 (March 2011): 823-835). Dalton, Patricia "Potential Effects and Challenges of Required Increases in Production and Use." GAO Reports (October 2, 2009): 1. MasterFILE Premier, EBSCOhost (accessed April 24, 2012). Gupta, Ram & Ayhan Demirbas. Gasoline, diesel, and ethanol biofuels from grasses and plants. New York: Cambridge University Press. 2010. Kniuksta, Bernardas, and Jonas Caplikas. "The Role of Alternative Use of Agricultural Products in the Eco-localization of Economy." Proceedings Of The International Scientific Conference: Rural Development 5, no. 1 (December 2011): 124-130. Organisation for Economic Co-operation and Development. Biofuel support policies: an economic assessment. Paris: OECD. 2008. Read More