South-Western College Publishing - Economics  
Castro Suggests that US Ethanol Emphasis May be Bad Globally, and He May be Right
Topic Supply and Demand
Key Words ethanol, subsidy, price.
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Reference ID: A161613758

News Story Cuba's dictator Fidel Castro recently wrote an article chastising the US for its emphasis on corn-based ethanol as an alternative fuel. He argued that it was bad for world food production to emphasize this, and he may be correct.

The problem with corn-based ethanol is that it diverts corn production away from food and moves it toward fuel production. This drives up the price of corn and corn-based foods at the supermarket in the US. As the US moves abroad to satisfy any excess demand for corn as food, the world price then rises, affecting many countries negatively.

Why the emphasis? Ethanol burns more cleanly than regular gasoline, and it's believed that ethanol may be the cure for the US' addiction to foreign oil. However, there's a difference between corn-based ethanol, and sugar-based ethanol. Corn-based ethanol requires a significant amount of energy to produce; in fact, some estimates show that it takes more energy to produce ethanol from corn than it saves by reduced gasoline consumption. Sugar-based ethanol does not require as much energy to produce.

Now politics enters the picture. Corn-based ethanol is subsidized by the US government, while it discourages imports of sugar-based ethanol. It's the subsidy that creates the emphasis on corn for energy production, creating the increased prices, etc. eliminate the subsidy, and the price problems in the rest of the world are reduced.

But it's difficult to reduce a government subsidy that everyone likes…except the taxpayer.

Questions
Discussion Questions:
1. Illustrate graphically the impact of the subsidy on the market for corn used for energy production.
2. In terms of environmental impact, what is the difference between corn-based ethanol and sugar-based ethanol? How does that translate into the economic problem at hand?
3. Why are poorer nations around the world suffering as a result of the subsidy in the article?
Multiple Choice/True False Questions:
1. In the market for corn used for energy production, the article describes a
  1. Increase in demand, along with an increase in supply.
  2. Increase in demand, along with a decrease in supply.
  3. Decrease in demand, along with an increase in supply.
  4. Decrease in demand, along with a decrease in supply.
2. In the market for corn used for food production, the article describes a(n)

  1. Increase in supply of corn.
  2. Decrease in supply of corn.
  3. Increase in demand for corn.
  4. Decrease in demand for corn.
3. The impact of the subsidy in the production of corn-based ethanol is to
  1. Reduce the cost of producing corn-based ethanol.
  2. Increase the demand for corn-based ethanol.
  3. Increase the cost of producing corn-based ethanol.
  4. Decrease the demand for corn-based ethanol.
Source "Castro Was Right." The Economist. April 4, 2007.
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