Fuel choices, food crisis and finger pointing

Link to the main article: http://www.merid.org/Content/News_Services/Food_Security_and_AgBiotech_News/Articles/2008/04/18/Fuel_Choices_Food_Crises_and_FingerPointing.aspx

Based on this article, merig.org on 18 April 2008, it states that U.S promotes ethanol and similar fuels, politician from poor country go against the policies in the U.S because these fuels increases food prices and some of them insisted on reanalysis of biofuel policies by the government policies of U.S. Many specialists argue that government mandates for biofuel is unadvisable, agreeing that the diversion of corn into fuel production causes higher prices. Higher demand for food is due to drought and rapid economic growth. (FAO) claims that if authority’s policies and biofuel production carries on, an increase of food cost from 10 to 15 percent is possible.

In my opinion, I totally disagree with the government policies in U.S because the soil used to grow corn and grains will become exhausted of minerals and nutrients due to overused. Additional energy needed to transport causes a negative impact on the energy produced by the ethanol. To me, corn based ethanol is profitable when exports to other countries such as Brazil. Although USA major competitor, Brazil produces sugar based ethanol which indirectly competes with USA, but in 2010, the bad weather in Brazil and India, two major sugar producing countries cause decrease in supply of sugar in Brazil. Increased in global demand increased the price of sugar. These two countries are the world’s largest sugar cane producers. The decreased in sugar supply causes Brazilian producer to produce more for sugar and less for ethanol. Thus, Brazil’s sugar-based ethanol supply is affected by increased in sugar price, it reduces its exports.  In the mean time, increase in consumer’s income causes demand of Brazil’s ethanol to increase. This shows income elastic and it’s a normal good. The decrease in exports of Brazil ethanol causes Brazilians to import more from USA.

Biofuel and food compete to utilize the same resources to produce ethanol which is made from corn. In 2007, Congress mandated a fivefold increase in use of biofuels. Due to this, farmers increases corn production. The increase in demand for corn increases the corn production and causes movement along PPF (production possibility frontier). Opportunity cost increases as moving along the PPF. Due to drought in South America, amount of corn produced does not change even though more land is used for corn production. The drought causes decrease in crop yield and the PPF curves inward. Higher opportunity cost causes cost of biofuel and food to increase. The increase in opportunity cost can be shown by the movement along PPF and inward rotation of PPF.  It is an inconsiderate movement of government policy in U.S because they do not think about the poor people in the rest of the world.

I think that corn production causes environmental impact due to increase nutrient pollution in water ways. Based on a report, Gulf of Mexico is the third largest dead zone due to nutrient pollution causes by corn production. Fertilizing corn and waste product from ethanol production, called swill is extremely poison to aquatic life. Government should enforce laws such as each factory are required to pay each unit of pollution it causes to the environment and use resources to collect data regarding nutrient pollution and fees charged towards factories from time to time. Besides, government should provide information about nutrient runoffs to public to increase awareness on how serious nutrient runoffs to the environment. People will become more aware, knowledgeable and indirectly decrease the amount of nutrient pollution.

Ethanol and gasoline are both strongly related. Ethanol is blended and mixes with gasoline to produce fuel. In 1970, the demand for gasoline is at the peak, due to this, the price increases. Government sets a price ceiling on gasoline to enable more people to afford it by limiting the price of gasoline. Thus, shortage occurs. Due to decrease in price, more quantity demanded than quantity supplied. Inefficiency occurs and creates a dead weight lost due to marginal benefit exceeds marginal cost. The shortage must be allocated among the demanders. The seller and buyers of gasoline increased activity to get the best price for gasoline and incurs an opportunity cost which is the time spent on searching which ended up higher than the price of gasoline without price ceiling. A black market occurs when the price sells exceeds price ceiling.

Recently, the demand of gasoline declines each year after 2007. This is due to government mandates on ethanol, increased efficiency of vehicles from ethanol and ethanol blending limit. It is the limit of ethanol blended to gasoline. I disagree with the government policy in USA in having subsidies in ethanol because although it promotes biofuel for production, thus, less depends on imported oil, but ended up environmental pollution far worse than gasoline. Besides, it shows that not enough acres available in the USA to grow corn to make the ethanol needed to power the vehicle. Due to subsidy, it decreases prices of product. Domestic taxpayer suffers the most as they pay the full cost. A corn farmer increases production of corn due to increase in demand.  Thus, leads to increase global price food. To overcome this problem, U.S. Department of Agriculture states that the Obama administration will implement a large sum of money to increase the biofuels production next generation. Companies will offer new biofuel projects on other plants, but not corn, and the government will match their investment. The Obama administration is planning to avoid using corn based ethanol to make fuel and relies more on USA energy independence. Apart from working up biofuel plants, the money used to fund existing corn-based plants is provided.

Rent Ceiling in New York City

Link to the main article: http://www.nytimes.com/2012/04/24/us/supreme-court-declines-to-hear-rent-control-challenge.html?_r=3

                A rent ceiling happens when the government sets the price under the equilibrium price. The rent ceiling law is imposed at about 200 cities in the United States, including New York City, Boston, and San Francisco and most of the country in Asia also has their rent ceiling imposed since early 2000. The purpose of rent ceiling is helping the poor to be able to afford the houses and homeless people. Government also try their best to eliminate the abandon houses by impose rent ceiling. It will help low income people to afford those abandon houses and also help the owners of the abandon houses to overcome their losses. ‘The Global Property Guide’ states that the rent ceiling was imposed by the government because it can help the nations avoid from high rents but it actually brings inefficiency.

            In New York City, they have their rent ceiling since 1947. According to Harmons’ lawsuit, it states that the rent ceiling price for New York City is around $1000 in 2008 which is 60% below the market price. When the rent ceiling is set below the equilibrium price, it actually causes shortage. Rent ceiling leads to decrease in supply by the landlords and the rental units will be scarce when rent ceiling is imposed. It can be proven by the graph below as it shows the shortage occurs when rent ceiling in New York City is imposed.

For example, the equilibrium price for rent is at $1600 per month but the government sets price ceiling at $1000, the landlords cannot set above $1000 as it is illegal region and it must be below the equilibrium price. In this situation, the landlords are not willing to rent their houses for the consumers because the price is lower than the equilibrium price which can brings loss to them. The quantity supplied will decrease from 80 thousands units to 60 thousands units. So, the supply of rental units will be in scarce. On the other hand, the consumer will highly demand on the house rents when the price is lower than the equilibrium price. The quantity demanded is higher than the quantity supplied. Therefore, a shortage will occur there. Rent ceiling also discouraged the landlords to maintain the quality of their rental units. When the quantity demand is high, the suppliers would try their best to reduce the cost of maintenance or even no maintenance so that they would not spend money on the maintenance because the price is set below the equilibrium rent to avoid loss profit.

                The graph above shows the inefficiency of rent ceiling. The search activity will increase when rent ceiling is imposed. Search activity defines the time spent to search people to do business for the landlords and the time spent to search rental houses for the nations. When rent ceiling is imposed, renters will spend a lot of time to search on the newspaper or the internet for various prices and opportunity cost will occur. The opportunity cost included the price of the house rents and also the time spent on search. Search activity is expensive because it takes up a lot of costs higher than without rent ceiling. For example, the renters will end up used a lot of costs on petrol or other resources and spend a lot of time on searching because of the limited availability of houses. As for the landlords, they will spend a lot of time to search for their customers and money on the maintenance fees because they cannot find a customer who can pay for the price which they can satisfy. Thus, search activity increased for the renters and landlords when there is a rent ceiling.

            Rent ceiling also creates black market as the landlords will find a way to go against the rent ceiling. Black market is an illegal transaction between renters and tenants which go beyond the legal limit price set by the governments. When the rent ceiling is imposed, the availability of rental units will be limit because the landlords are not willing to rent their houses. However, some of the renters will be desperate to rent the houses and the landlords will take this opportunity to offer in a high price which against the rent ceiling. Due to desperation, some of the renters are willing to pay at the price that offered by the landlords. For example, the renters are willing to pay $ 2,800 per month which offered by the landlords even though the legal price is only at $ 1,000 per month because rent ceiling causes limited availability of rental units.  From this, there will be reduction consumer surplus and producer surplus occur. Consumer surplus is the benefit received more than the price they paid for it. For example, the renters who involved in black market do not have to spend a lot of time searching and other resources like petrol expenses to search for a house. Producer surplus is the amount received more than the equilibrium price or the cost of production. For example, the legal rent price is at $1000 but some of the renters are willing to pay $2,800 for the rent and it is higher than the equilibrium price. Thus, the landlords will gain extra profit. Deadweight loss will also occur because the quantity of housing supplied is less than the equilibrium quantity. The deadweight loss is loss to the society because rent ceiling causes shortage which makes the nations unable to rent a house.
 
            In conclusion, rent ceiling only benefits the families which have higher income that already lived in a city for a long time. It is because they are able to pay at a higher price which can satisfy the landlords. The newcomers or poor nation will not able to rent any houses as the landlords are not willing to supply the rental units when the rent control is imposed under the equilibrium price. Not only that, the landlords will make a loss when the price is under the equilibrium price because they need to spend a long time to find a customer who can pay higher price which can satisfy them. This causes the renters and landlords to have difficulties. To summarize the whole thing, the rent ceiling creates shortage, increased of search activity and black market which does not benefit the society. Government should do something to overcome the inefficiencies of rent ceiling to avoid unfairness in the society.

California’s Fuel Price Rises

Link to the main article: http://www.bbc.co.uk/news/world-us-canada-19853740

     The price of fuel rising has always been a dreaded news for every consumers, and in this case, the Californians. According to BBC news, the increase in fuel prices was caused by a shortage of fuel in a particular refinery and leads to the closing down of some businesses. In economic terms, a price hike will likely mean a decrease in quantity demanded, an increase in quantity supplied and inflation, all of which would eventually slow the economy.

     The law of demand states that as price of a good increase, the quantity demanded decreases, with other things remaining unchanged. This can be applied to the fuel price in California. One of the causes for this concept is the substitution effect. With such a high increase in fuel price, consumers are bound to feel unsatisfied and find other substitutions for fuel. For instance, consumers will start using public transportations, walk or cycle to their destination. To them, these would be cheaper. This indicates that the opportunity cost of fuel has increase. Thus, as people starts to look for other alternatives, the quantity demanded of fuel would eventually decrease. On the other hand, income effect is another reason for a decrease in quantity demanded. With an unchanged income and the unreasonably expensive fuel, a majority of consumers would not be able to afford goods that they have always bought . As a result, consumers are forced to reduce the quantity demanded of fuel to be able to maintain other expenses. In this instance, with the budget that results from cheaper transportation fees, people will use more of public transportation. Hence, the quantity of public transportation demanded increases because of income effect and also substitution effect. Therefore, independent petrol stations are forced to seek solution to cope with the price hike and loss of customers. As reported in BBC news, some business have “closed down their pumps rather than cut into profit margins”.

     In my opinion, the substitution effect would be the greater of the two in the United States. In a First World country like the States, public transit is not a hassle. With an increased fuel prices, coupled with the advanced technology of public transportation, there would inevitably be a resultant increase in public transit expenditures. It is evident that people would flock to use the buses, monorail and subway during the peak hours – working and lunch hours – because of cheaper transit fees. If the price remains permanently high, there will be a reduction in the car fleet, mostly of heavy vehicles, with fuel consumption decreasing. Another alternative to private transport would be using energy-efficient cars like hybrid vehicles. This also indicates an increase in fuel efficiency, due to an increased use of more fuel-efficient vehicles, reduction in private transport demand, and a decrease in congestion level.

     Besides the law of demand, the law of supply is also in the works. The law states that  as the price of a good increases, the quantity supplied increases, with other things remaining unchanged. In short, when the price of fuel increases, a large quantity of fuel that producers are willing to supply increases. Thus, producing more fuel and earning revenue from that will bring the profit of a fuel company up.

     Having said these, fuel is very significant in our daily lives. It generates our cars, trucks, electricity, and machines in the industries. With the price of oil increasing, transportation cost, utility cost, and almost everything will rise. Thus, with the price levels increasing, inflation occurs. However, the increasing of the fuel price is temporary as it is just to adapt to the shortage of oil. This can be reasoned with the concept of price adjustments. As reported in the article, a power outage, which occurs in a Californian refinery, has the supply of fuel cut, therefore causing a shortage. The graph above shows that shortage pushes the price up and toward its equilibrium price. However, the shortage would be reduced because the quantity demanded is reduced and the quantity supplied is increased by the rising price. When the shortage is gone, the price will stop increasing and instead falls back to its equilibrium price.

     The other reason that this issue would be temporary is the environment that we live in. The situation is such that we not only have a limited amount of businesses that sell fuel in an area. This environment is such that the businesses cannot afford to incur higher fuel prices for long and lose their customers because of other competitors in the area. If the price for fuel were higher in a fuel station than the other, consumer would just buy the cheaper one. Therefore, the price level will fall back to normal given an amount of time. Again, the substitution effect is recurring. In this instance, the fuel has an elastic demand.

     Another concept that can be exemplified is the elasticity of demand-closeness of substitutes and time elapsed since price change. In the States, fuel has a few close substitutes: public transportations, hybrid vehicles or even carpooling. The thing is, only if the prices are inexorably high – and stay for a long time – would high prices actually have permanent effect on consumer behavior, for example, a natural disaster occurring. In my opinion, the bottom line is that people will take any transportation just to get to work. In the case of workers transporting goods, though they are not able to use public transit, they can afford higher price fuel temporarily. In this case, the demand of fuel is elastic. The second factor that influences the elasticity of demand is the time period after a price change. The longer the fuel has to sustain without losing its value, or the longer the consumers have to adapt to a price change, the more elastic is the demand for fuel. Although the price of fuel has increased, consumers will still maintain the quantities of gasoline that they bought. This again proves that fuel has an elastic demand. On the other hand, as it is shown that the price hike is only temporary, the elasticity of demand for fuel will not undergo a big increase and remain unchanged. In addition, the reaction of quantity supplied to the price change when only some adjustments to production can be made is called short-run supply. To cope with the shortage of fuel in California, the industries just have to expand their work force and labor overtime. Hence, adjustments like these can be made in the short-run to increase production.

     Having proven that fuel is the lifeblood to our society, a temporary change in price would not result in a significant alteration to the economy. In short, a price hike can only invoke such a change that the quantity demanded is decreased, quantity supplied is increased and substitution and income effect are more recurring.

Congestion pricing in london

Link to the main article: http://www.lincolninst.edu/pubs/2041_Congestion-Pricing-An-Overview-of-Experience-and-Impact

Based on this article, lincolninst.edu on May 2011, congestion pricing have indeed control travel behavior, increases speed and decreases in traffic jams. Public transportation has replaced car pools between people. Operating expenses and costs of enhancement of public transport requires large amount of money, but congestion tolls have covered the expenses. No proof shown that shops in the charging area been badly affected. Due to traffic reduction, pollution has sharply been reduced. In 1996, a study shows that employment in central London sharply increased but decreases in inner and outer London due to congestion pricing. Besides, the advantage of congestion pricing is there is higher income household in that area. Change in price of travelling to city centre causes more business activities to occur. Bhatt states that reduction in vehicles emissions, more funds for transportation investment are due to congestion pricing.

In my opinion, despite lesser traffic jam, more revenue to fund transport improvement , evasion increases as more people uses bad ideas such as fake car plates to avoid paying. To overcome this problem, people are required to register their car plates before entering a particular place, many cameras are installed, captured and recorded in a database. This database has every details of each people’s movement. Although it helps detects people avoid paying congestion price, but cameras invades people’s privacy and in some occasion, people are wrongly ticketed. Furthermore, the income of lower class people will decrease significantly because it serves as a burden to them. Thus, this gives the largest impact when they require driving to work every day and sometimes during off-hours with congestion pricing unavoidable. It also causes unfairness because some residents staying at the particular area and handicapped people have discount on paying congestion pricing. The most important is survival rates from cardiac arrests rises due to reduction in traffic jams. Transit service is crowded during peak hours, although bus service improves and revenue is used to upgrade the system but it is still unreliable. This is because a transit system might not guarantee a handicapped person to reach their destination on time. Thus, the possibility for them to lose their job is high.

            Based on the graph above, due to congestion pricing, people will switch to public transport; the demand curve (AB section) is willing to pay a very high transport fare. This helps to cover their basic marginal cost and capital cost. However, setting a price at C will lose profit shown at triangle ABC because some people are willing to pay more (marginal benefit). At A, operator will lose profit above the marginal cost but below A. Transport operator is the one who sets the transport price. At triangle BYZ, transport operator loses some profit which some passengers that are willing to pay at above the marginal cost but not decided to pay at C price.

 Congestion pricing in shopping area causes the demand of goods to fall because people are not willing to pay congestion pricing so they will seldom drive to that area.  If the demand of goods is inelastic, a slight increase in congestion price will have small effect on reducing demand but if the demand of goods is elastic, higher price congestion pricing will cause the demand to sharply reduce in shopping areas. For low income people, it is a demand elastic as a slight increase in congestion price cause low income people to switch to bus service. The car sales will be affected as more people switch to public transport to avoid congestion pricing. Overtime the congestion charge may become more effective. In a longer run, people have time to buy a bike; shops may relocate outside the congestion charge.

As for me, I don’t agree with government policy in London. Despite congestion pricing reduces pollution because more people uses public transport, so less car, less emissions of gas but it increases pollution in an indirect way, people would travel a further distance to avoid congestion pricing. Thus, the longer distance it travelled, the more gases the vehicles discharged. In addition, the opportunity cost of government using large amount of money to buy sophisticated technology to track people who don’t pay tax is government can use the excess money on enhancement of transport running costs and improves security by installing CCTV to ensure the safety of citizens.

Besides, I think government in London should implement the congestion pricing that depends on factors such as distance travelled by vehicle in the pricing area and type of vehicles rather than fixed costs of pricing for all vehicles.  This shows a more precise cost imposed on driving. Although fixed price for all vehicles is easier to implement and understand, but it does not motivate people to minimize driving. Installing cameras in congestion area indeed easily detect people, who avoid paying taxes, but sometimes Malaysia’s congestion problem is serious during peak hours so government should build bridges or underground tunnels to smooth the jams.

 

Some people still prefer to drive car because it is more convenient to go any places. In 2007, the demand for Honda car in London increases because it is environmental friendly, so government encourage user by having tax reduction. Besides, it has the ability to detect traffic jams. Honda increases supply to meet rising demand of consumers.

The negative externalities are damage on roads due to frequently crossing by vehicles and pollution. By having congestion pricing, less people drives car and takes public transport, means less car leads to less wear and tear on the road. Thus, road maintenance cost will be decreased. Cars becoming more fuel efficient help to reduce pollution. Besides, cost to employee loses job because the employer gets angry with their lack of productivity due to using public transport every day.  Government should think twice before implementing a law to ensure citizens have the maximum benefit.