To eat . . . . or to drive? – Times Online

The whole debate over global warming has just as many economic as environmental implications. A recent article in The Times illustrated how the growing investment in renewable biofuels impacts on global food markets.

Apparently as a result, Japanese snack packets now contain 10% less chips than they did a month ago, while the price of beer at the Munich Oktoberfest will be at record levels.

These, say industry insiders, are the first skirmishes of a conflict that could soon dominate geopolitics: the war for resources between the world’s 800 million cars and its six billion stomachs. In the developed world, the war will come down to price and choice; in the developing world it could come down to survival. The war centres largely on global demand for biofuels — “green” replacements for petrol, such as ethanol, that can be produced from sugar, corn and other agricultural products rather than fossil fuels.

Wheat and barley fields are being replaced by ethanol sources, such as sugar and corn, in the USA and Brazil. Reduced food supplies are leading to higher prices for snacks and beer. The article states starkly that the “war for resources” will be between cars and stomachs. Economists would not envisage such an apocalypse, because they believe that the price system will efficiently allocate resources even on such a wide scale over the globe and between such apparently disparate goods. But the intermediate scenarios should be interesting.

National Geographic News Photo Gallery: Week in Photos: Monster Hog

Near Delta, Alabama, May 3, 2007—Hogzilla may be headed for horror-movie heaven, but the massive swine that became an Internet sensation in 2004 may have been bested, size wise, by this reportedly wild pig killed May 3 by Jamison Stone, 11, and reported by the Associated Press on Wednesday.

From tip to tail, the newfound hog—dubbed “Monster Pig”—measures 9 feet, 4 inches (284 centimeters) and weighs in at 1,051 pounds (477 kilograms), according to Stone’s father.

At a 150-acre (60-hectare), fenced hunting range, Stone said, he shot the huge beast eight times with a revolver before tracking it with his father and guides for three hours. Finally, the boy shot the hog at point-blank range, killing the animal, the AP reported.

While hunting by children is legal in Alabama, officials are investigating whether anyone had transported and released the live feral pig into the hunting preserve, which would violate state law.

Okay, so maybe this one’s a stretch for a blog about economics, but sometimes when you see something in the news this amazing, you just have to share it with the world! Let’s see if I can come up with some questions about this one!

Discussion Questions:

1. What impact would “monster hog” have on the price of pork (assuming it goes to market)?
2. What will happen in the beef market once “monster hog’s” meat reaches the market? Explain.
3. Can you think of a product that might be a compliment to pork? Describe
   what will happen in that product’s market thanks to “monster hog”.

Looks like China could use a few monster pigs of its own to relax the steep increase in pork prices recently!

Tighter supplies lead to big price rises for pork, eggs-21food.com

THE prices of pork and eggs have soared in past weeks across China due largely to tighter supplies and increasing production costs…Food products account for 33 percent of the CPI in China with meat, poultry and related products making up about 20 percent.

According to the Ministry of Agriculture, live pigs nationwide were 71.3 percent more expensive than a month earlier, and pork, 29.3 percent higher.

In Beijing, the price of slaughtered pigs went up more than 30 percent in recent days…

An outbreak of blue ear disease, also known as Porcine Reproductive and Respiratory Syndrome, among pigs in Guangdong Province and the Guangxi Zhuang Autonomous Region, causing many deaths and a large amount of pigs to be culled, according to the National Development and Reform Commission…

“This sent a strong signal for distributors to jack up prices,” said Xu, adding that this exacerbated the unbalanced supply and demand.

“Pig raisers have lost money in the past couple years and they are reluctant to raise pigs. This led to a marginal decline in live pigs this year.”

Still worse, edible oil and grain prices rose at the beginning of this year, and feed prices followed suit.

Grain prices have risen largely due to an anticipated decline in output this summer and will continue to increase slightly in the coming weeks, boosting the prices of pork

Discussion Questions:

1. What is the “CPI” and why has it risen in China recently?
2. Does this article discuss the determinants of demand or the determinants of supply? Which determinant is being affected in the pork market?
3. What is happening in the market for pork in China? Which curve is shifting, supply or demand?
4. What “strong signal” led pork distributors to “jack up prices”?
5. If the price of pork continues to rise, what should happen to the supply of pork? Explain.

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Gas hits record high price for eighth straight day – May. 20, 2007

According to CNN.com:

“The run-up in prices is a big concern for store chains, according to the retailers’ trade group. Its survey of consumers released early Friday found the average consumer believes that the price of gas will reach $3.32 per gallon by Father’s Day… As a result, 40.2 percent of consumers are taking fewer shopping trips, while 37.9 percent told the survey they plan to shop closer to home.”

“To offset the effects of higher prices, more consumers are giving their wallets a little extra cushion by cutting back on discretionary spending or choosing to frequent retailers closer to home.”"

And this is a bad thing? To big chain stores, perhaps, but what about the neighborhood businesses (are there still any of those?) that will benefit after years of losing business to big box retailers like Wal-Mart and Home Depot? Consumers driving less may harm major retailers whose stores tend to be clumped together in mega shopping strips on the outskirts of towns, but surely the benefits of less driving outweigh the costs.

Fewer cars on the road mean less traffic, less noise, more space for cyclists, less hazard to pedestrians and children playing ball in their yards, cleaner air and a deceleration of global warming, more customers at neighborhood businesses, and perhaps even more quality time with family and friends (if we can assume less time shopping means more time with each other).

So if high gas prices result in so many improvements in our environment, relationships, communities and health, why are they such a bad thing? Perhaps because higher gas prices overburden the poor. Since fuel makes up a larger proportion of a poor family’s budget than a rich one’s, higher gas prices put a bigger dent in the disposable incomes of the poor than the rich. Economic theory would indicate that the poor’s demand for gas is more elastic than the rich’s, meaning that price increases are met with a greater decrease in consumption than someone for whom gas makes up a relatively small part of their overall budget. This, again, may not be so bad. Perhaps the poor will begin limiting their outings to those that are deemed most necessary (such as to and from work, school, child care or clinic) and cut back on unnecessary trips (such as to mall, the movie theater, the go cart track or the Wal-Mart across town). Less consumption may not lower overall standard of living when we consider that much of the consumption going on by Americans (rich and poor alike) is frivolous and ostentatious.

Even acknowledging the regressive nature of the burden of high gas prices, it still seems to me that higher prices are necessary to achieving a cleaner, healthier, better functioning society. The problem is, if prices are kept artificially high through price gouging, as the Democratic leadership in Congress seems to believe, then the full benefits of higher gas prices are being passed on to oil companies rather than society, as could be achieved with an effective gas tax.

CNN presents their own solution to the problem of high gas prices:

From higher taxes to more drilling, ways to cut gas prices – May. 10, 2007

1- Pass a carbon tax
2- Increase efficiency
3- Push alternatives
4- Require oil companies to make more gas
5- Build a gasoline reserve
6- Drill more oil

It’s too bad my AP class has finished for the year. I think a great quiz would be to hand them this list and ask, “What’s missing?” Anyone who’s completed a semester in a Principle of Microeconomics course should be able to get an A on such a quiz. Can you tell what’s missing? If so, please post your comment here. (Hint- fill in the blank: Supply and ______?_______)

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Here’s a follow-up to the previous post about stupid Americans acting stupid. Looks like the stupidity is not limited to the idiotic idea of boycotting gas for a day, rather it is alive and well among America’s leaders. Here’s the Democrats’ solution to the high gas prices faced by Americans today:

Join the Campaign to Change America / John Edwards ’08 Blog

“The ENERGY PRICE GOUGING PREVENTION ACT will provide immediate relief to consumers by giving the Federal Trade Commission the AUTHORITY to investigate prices–focusing on the causes, the burdens they put on American families and businesses, and solutions.”

And here’s an insightful and entertaining critique of the Democrat’s proposed bill by economist Tim Haab:

Environmental Economics: All politicians are idiots and other obvious thoughts on high gas prices

“There are two possibile explanations for the Democrats proposal of the STUPID bill. 1) They think the public is too stupid realize they are trying to “do something” by proposing a STUPID bill, or 2) They are idiots. Since Env-Econ readers obviously represent a cross-section of the public, and since Env-Econ readers are smart enough to know that this bill is STUPID, I have to conclude that 1) is logically impossible and therefore, 2) must be true. So we’ve now proven that Democrats are idiots. We’re halfway there.”

The stupidity of this proposed bill lies in the fact that Democrats seem to champion environmental protection, reduction of greenhouse gas emissions, and a solution to the global warming problem, while simultaneously fighting for regulations that REDUCE the price of greenhouse gas emitting fuel, the repeal of gas taxes, the expansion of oil refineries’ capacity, and other measures that will assure the cheapest gas possible for American drivers. The two goals are incompatible, as the solution to the greenhouse gas problem requires HIGHER gas prices, not lower gas prices.

What policy makers don’t realize is that “high gas prices are NOT an economic or political problem.” Markets allocate resources efficiently when markets are allowed to work. Higher gas prices reflect the basic economic law of scarcity, supply and demand. With developing countries like China demanding a greater proportion of world reserves than ever before, American drivers preparing for their summer road trips and a war raging in the middle east, higher prices at the pump should come as no surprise. Intervention in the gas market will result in greater inefficiency, as prices kept artificially low by government interfere with the market mechanism, increasing the quantity of gas demanded, and further exasperating the depletion of this scarce resource (not to mention contributing to the nation’s greenhouse gas emissions). The shortsightedness of legislators may only postpone the inevitable price rises of this resource for tomorrow’s consumers, while work in the complete opposite direction as they desire on the global warming front.

Ultimately, higher gas prices are necessary and desirable if we are to transition to more environmentally friendly fuel sources. As petrol reaches $4.00 per gallon, consumers will think more seriously about buying more fuel-efficient automobiles, using public transportation, choosing to cycle to work and taking other such steps towards reducing their carbon footprints. This, after all, is the only way Democrats will ever achieve their other supposed goal of avoiding the catastrophe of global warming and achieving greater energy independence; and this can only happen if gas prices continue to rise.

So what about “price gouging”? Concentration of market power among a handful of firms in the oligopolistic oil market may indeed result in some degree of collusion and setting of prices above equilibrium. This is inefficient, yes, but it occurs in a market in which, unregulated, equilibrium output and price would also be inefficient due to the existence of negative externalities. In other words, even were oil companies competing directly, the price would be too low and output too high since the price of gas does not include the full social cost of gas consumption. In a way, the inefficiency arising from excess market power corrects the inefficiency arising from the existence of externalities. The catch is this: consumers end up lining the pockets of oil companies rather than filling their own national tax coffers, since the higher price is a result of collusion rather than taxation.

What policy makers should be discussing is the imposition of new gas taxes, which, rather than only increasing the price consumers would pay, would reduce the ability of oil firms to price gouge, taking a chunk out of their “record profits” and turning it into tax revenues. These revenues could then be invested into research of new fuel technologies, the subsidizing of which would increase their supplies, making them more competitive as a substitute for petrol and thus more attractive to consumers. This helps politicians achieve their goal of energy independence and reduction of greenhouse gas emissions. Lower gas prices NOW will only postpone this important transition.

Here’s another clear presentation of why politicians should not meddle with oil prices: Knowledge Problem: Price Gouging – Politicians vs. Economists

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Environmental Economics: I couldn’t decide between “Gas Boycotts Don’t Work” and “Oh Crap, Here We Go Again”

So, the idea is that on May 15 (today in America), millions of Americans will boycott oil companies by not filling their cars with gas in the hope that firms like Exxon Mobil, Chevron, Shell and others will be forced to lower their prices. The goal is to make oil companies lower their price per gallon by 30 cents.

Remember my post below “Why learning Economics is SO important”? The American “Gas Boycott” is a perfect example of how people uneducated in economics can rally around really stupid and senseless ideas. The authors of Environmental Economics, a great blog, give all the reasons why this gas boycott will not achieve its goal. These are ALL basic economic concepts, which means that if ONLY the organizers of this boycott had bothered to take a principles course, they would have spared themselves of this embarrassing attempt at activism. I’ll keep finding reasons why learning economics is important, you keep learning!

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Marco’s IB Economics Blog: Class Discussion Continued

Marco, in the above post, brings up some serious questions about the science of economics. Good insights, as always Marco. I tend to agree with him on his main idea, that economics as a science tends to perhaps unwittingly make value-based judgments even as economists claim to be objective observers of some fundamental law or principle.

The risk with broadening economics’ focus to the Aristotelean “metaphysical” level that Marco speaks of is that a science rooted in the law of scarcity is scarcely equipped to deal with metaphysical resources beyond those very physical resources we deem to be finite (land/labor/capital).

Some economists, such as Julian Simon, have explored the idea of the infiniteness of resources due to the creativity and innovation of the human mind, claiming that any physical scarcity that may exist on our finite planet can be overcome as human ingenuity (the “ultimate resource”) constantly develops new and better means of employing those otherwise finite resources. Even this venture beyond classical economic thought runs the risk of shattering the foundations of the basic science, that is the belief, the TRUTH, that “scarcity exists”. If we accept this truth, and we accept that the market mechanism is an effective means of dealing with scarcity, then we have no other choice than to embrace the price mechanism in all its materialistic and dehumanizing, “Machiavellian” glory.

“…as a social study, economics studies society and the world around us. However, that does then not mean that we should only perceive the world in terms of economics, and economics today connotes profit maximization.”

As Marco says, “we should not only perceive the world in terms of economics”. On this point I could not agree with him more. Indeed, economics may not provide you or me with answers to life’s most basic questions, like where I’ll go when I die; but one question this imperfect science will help answer is how will my basic needs be met while I’m here on this earth burdened with the curse of scarcity? The answer? Markets. Alas, the invisible hand of which Smith spoke may not be that of God, rather that of the Almighty Dollar.

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