Friday, 4 February 2011

Ethanol, bad business, bad for food prices.

Basic economic theory inevitably demonstrates that when government affords a subsidy in order to make production of a particular good or industry profitable, then the capital and other resources (including the human resources) attached to that product or service is misallocated.

Whether we are talking about the US, India, Australia or as with any other nation, if the production of ethanol based fuel products cannot be conducted profitably without government subsidisation, it is an inefficient use of valuable and scarce resources.

Profit and loss signals that come from honest market competition without intervention extend the necessary signals and evidence to those parties in the market allowing them to determine if the resources needed for the creation of a good or service are used in a manner that creates wealth and hence value for the consumer.

The push towards subsidizing ethanol is anti-market. Already, large subsidies are skewing the market mechanisms such that self-interested parties (those in the industry itself) and the politicians that have something to gain (either through the support of rural areas growing corn and other highly inefficient ethanol feed stocks or those who want to be seen as “green”) can benefit at the expense of others.

The rise in the cost of food as well as the associated higher taxes may seem to be spread thinly across the population. The result being a seemingly minor rise in a single price that can be borne by all without notice, but the fact is that one subsidy is never enough and we all pay again and again in both increased taxation and inflated food prices.

This food inflation affects the markets across the rest of the country and not just the locality it is derived from. More, the global nature of commodity markets and the fungibility of many base food products mean that an increase in subsidization in one country not only leads to a localized increase in taxation and prices, but the food costs are inflated across the world.

In this, it is the poor who suffer most. The poor have the lowest elasticity of demand for food. They are already on the edge of subsistence and an increment in prices caused by the misallocation of resources to support the corn ethanol industry and the few in it means that they have even less food.

Scare tactics work. They have driven an unfounded drive towards the misallocation of goods in the creation of ethanol markets.

It is not just the consequences we see that matter, it is also the unseen effects that change the world. Starving millions for a product that people do not want is not a good policy.

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