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Econ

In: Business and Management

Submitted By akhoury
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In a news article published on the 11th of October 2011, IPS reports out on an increase in food prices due to dramatic climate changes and the increase in demand for biofuels (See Figure 1), which are fuels derived immediately from living matter. Just before World Food Day, which occurred five days after the report was put out, this situation called for control price volatility in the market for food for the reason of protecting LDCs from possible famines and hunger crises. Price volatility is the relative rate at which the price for a commodity changes over time, so the report is simply looking to control the increase in price volatility in the market for food. 26 countries were at risk of facing hunger strikes. To potentially solve the problem, the US and the European Union decided to subsidize, pay part of the cost of producing a good or service to keep the selling price low, biofuel (its’ high demand being a factor of the crisis) production as an alternative to crude oil, which would hopefully give farmers an incentive to shift production in biofuel crops. Furthermore, the weather has also played its’ role, with droughts and floods decimating crop fields, which further raised food prices due to farmers not being able to produce. This is especially significant to famers in poorer lands; with not many resources to re-kick start their production. Now, what is this article really about?

The government intervention present in this article is a subsidy, which as mentioned before, a sum of money granted by the state or a public body to help an industry or business keep the price of a commodity or service low. The products being subsidized are crops that can produce biofuels, as the growing demand for biofuels is one of the reasons for the increase in food prices. The government felt that with the incentive of creating a subsidy, this would allow farmers to produce non-biofuel products, thus hopefully somewhat resolving the food price spike (See Figure 2).

Another reason for the increase in food prices is the non-price determinant of environmental disaster. The article stated that weather events, especially droughts and floods have been wiping out crop fields, thus making the land no longer fertile, killing the crops, and further raising the prices of food, due to farmers having no produce. As the supply goes down, the supply being the crops, prices of food in the market will increase (See Figure 3). This would’ve proved extremely difficult for families who spend most of their income on purchasing food, due to the higher prices, food has become more of a necessity to them than any other products, thus making food more inelastic for families with low proportions of income.

Thus beings the critical evaluation. Three stakeholders will be affected after what the article has reported. First of all, consumers will be affected by this crisis due to the increase in price forcing them to ultimately pay more for their food, with families with low proportions of income more affected due to them now having to spend more of their income on food, thus opportunity cost as they would have to give up other goods in order to suffice their daily need for food. Producers will also be affected, as because of the environmental disasters that cause no production of farmer’s crops, they will not have any output to provide to the market, thus not make any revenue. A long-term impact from this crisis on the farmers would be unemployment, should natural disasters continue to impact their production of crops. The government subsidy would also affect them. With the subsidy being that farmers would produce less crops that can produce biofuels, they will have an incentive to produce alternatives and to produce while being more environmentally friendly. Speaking of the subsidy, the reason the government would be affected, as a stakeholder would be because of the debt they have from the subsidy they paid.

Now, the GHI has stated that it is preferred that countries should invest more in sustainable, small-scale agricultural businesses. Instead of having to worry about importing and exporting crops and nourishments from abroad, it would be more efficient if farmers only focus on feeding their local population and that the government re-invests in this. This recommendation would prove more efficient, yet will still have its limitations. Should a price increase occur again, it would affect only a few nations other than nations that rely on other nations’ crops to be imported. Same thing with the factor of possible natural disasters, if a drought or flood hits a nation who is now only feeding it’s local population, despite it still being a problem, it would prove more fitting to have one nation struggle compared to many nations. It is basically a fallacy of whether or not to have one nation struggle with food prices, or many more, should this crisis continue or occur again.…...

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