Biofuels are increasingly being used as an alternative source of fuel. This is due both to constraints on the supply of oil and concerns over climate change. However, whilst biofuels can lower fuel costs and reduce CO2 emissions, they are associated with higher food prices.
This assignment challenges you to apply microeconomic models and concepts to the issues raised by biofuels. There are 3 parts to the challenge, each of equal weight in the final mark.
Part A: Your first task is to use models and concepts relating to producer behaviour to analyse the effects of increased demand for biofuels on the inputs to its production (including crops, such as corn).
i. Analyse the impacts of increased demand for biofuels on the demand for and price of crops such as corn.
ii. Analyse how developments in agricultural and conversion technology might influence the impacts identified in Part A (i).
iii. Analyse the effects of increased competition between participants in the oil market on the impacts identified in Part A (i).
Part B: Your second task is to use models and concepts relating to consumer behaviour to analyse the effects of changing fuel and crop prices on individuals.
i. Analyse 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).
ii. Repeat the Part B (i) analysis for a high income person who spends a relatively small proportion of her income on food. Comment on the distributional consequences of the changes in the price levels.
Part C: Your final task is to identify and discuss possible government policy responses to the issues raised in Parts A & B.