IB HL Economics
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...