Starvation via Gas Guzzling

The book Hungry Planet compares the average food consumption of families around the world. For example, the Aboubakar family lives on $1.23 per week. It looks like times are getting even tougher for families like these.

The impact of rising food prices on food aid is part of a broader debate about the long-term impact on the world’s poorest people of using food crops to make ethanol and other biofuels, a strategy that rich countries like the United States hope will eventually reduce dependence on Middle Eastern oil.

Some advocates for the poor say rising food prices could benefit poor farmers in developing countries, providing them with markets and decent prices for their crops. But others warn that the growing use of food crops to make fuel, especially if stoked by large subsidies in rich countries, could substantially increase food prices. That could push hundreds of millions more poor people into hunger, especially landless laborers and subsistence farmers, according to a recent article in Foreign Affairs magazine.

Thom Lambert provides good background on the issue. Certainly we should suspect the subsidies that threaten to divert ever more resources from the poor to the rich. But we should also look beyond the mercenary lobbying evident here to a broader range of phenomena afflicting buyers of products with a somewhat inelastic supply when rivals move in with vastly greater buying power.

For example, compare the following hypotheticals:

A) Large luxury vehicles leave in their wake sticky particles that make all standard vehicles have to “work” much harder to travel (say the particles require as much effort to get past as, say, a 10% uphill grade in the road). The average driver of the cheaper vehicles has to buy twice as much gas in order to travel the same distance.

B) A luxury vehicle consumes five times as much gas as standard vehicles. The price of gas doubles due to the popularity of such vehicles.

Economists would have no problem identifying the particles in A) as an externality. But why not the extraordinary demand in B)? In both cases the drivers of standard vehicles are paying twice as much for gas because of the actions of the luxury car drivers (ceteris paribus). A neo-classical response would be: the extra demand just shifts the demand curve out, and eventually suppliers will respond by bringing more fuel to market. But in the short and medium term, supply is relatively fixed: refineries are difficult to build, and oil exploration is a notoriously slow process. If their buying power is very high, the luxury car drivers will not be sensitive to the “signals to conserve” the market is sending via high prices, and may instead force those signals to become ever “louder” to those lacking their buying power. As food and fuel become increasingly interchangeable (alternative fuels like ethanol are often made of grains), Lester Brown’s worry about our “starving the people to feed the cars” becomes compelling.

So far economist Robert Frank has modeled the waste that can occur when individuals compete for a “positional good,” one whose value depends in large part on its rank compared to others in its class. Such positional goods can often generate winner-take-all effects, where early control over a resource can lead to ever-increasing returns. The evolving story of biofuels shows that winner-take-all competitions–or even winner-take-most competitions–can lead to deadly consequences for the losers. One more reason for expanding Ramsey Pricing.

You may also like...