Economic Effects and Ethanol Helps

Question: Discuss about the Economic Effects and Ethanol Helps. Answer: Introduction: In a perfectly competitive market, an increase in the price of a commodity leads to a decrease in the demand for the product. In this regard, an increase in the price of petroleum, a raw material in the manufacture of fiberglass, may result in a slight reduction in its demand due to increased costs. Notably, an increase in the price of a variable input results in a subsequent upward shift in the average variable cost marginal cost (MC), (AVC), and average total costs curves (ATC) (Tomilson, n.d.). However, in this case, petroleum is a fixed input in the production of fiberglass (Tomilson, n.d.). Generally, an increase in the price of a fixed input brings about only an upward shift in the ATC. Over the long term period, all factor inputs are variable. In turn, this allows the boat firm to change its scale of production to accommodate the new prices of petroleum (Tomilson, n.d.). Consequently, this opens up the possibility of exploiting economies of scale, thereby allowing it to reduce its long run average total costs (Tomilson, n.d.). For this reason, the profits of the firm will be positive. Typically, the provision of a government subsidy results in a reduction in the cost of producing a product. More precisely, a government subsidy of 38 cents per liter on ethanol production will bring down the costs of producing the product by the same amount. For this reason, the supply of the product in the country will increase significantly (Australia Parliament, n.d.). One can attribute this to the fact that producers of the commodity will be able to produce more of the product at a lesser cost. Primarily, Ethanol is a substitute for petrol. Sometimes, it is added to petrol suppliers by some retailers in Australia. It is imperative to note that the recent increases in the prices of fuel in the country following global shortages of oil prompted the government to grant a subsidy to ethanol producers. Essentially, the subsidy is meant to increase the supply of ethanol in the country, thereby provide an alternative source of energy. Given that the subsidy will result in a decline in the cost of production of the commodity, its prices will be relatively lower than the oil prices in the Australian economy (Materson, 2010). Besides, the product is eco-friendly. For this reason, the subsidy is founded on economic merit. It is imperative to note, however, that the subsidy on ethanol production will have adverse effects on other industries in the country, especially the agricultural sector. Principally, the grant will result in an increase in the price of pork in the country. In turn, this will lead to a subsequent reduction in the economic profits accruing to the pork farmers in the short run (Materson, 2010). Mainly, this is because the subsidy will lead to a rise in the price of feeds in the country. The increase in the price of feeds is brought about by the fact that ethanol production increases the demand for corn. Subsequently, ethanol firms will compete for corn with farmers, thereby raising the price of corn. In turn, this scraps off the profits accruing to farmers, thus making them worse off. References Masterson, K. (2015). Fuel Vs. Food: Ethanol Helps Boost Meat Prices. [Online] WBUR News. Available at: https://www.wbur.org/npr/132082743/if-your-meat-prices-rise-you-can-blame-ethanol [Accessed 16 Apr. 2017]. Parliament of Australia (2015). The economic effects of an ethanol mandate. [Online] Parliament of Australia. Available at: https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/RP0708/08rp18 [Accessed 16 Apr. 2017]. Pettinger, T. (2008). Effect of Government Subsidies. [Online] Economics Help. Available at: https://www.economicshelp.org/blog/915/economics/effect-of-government-subsidies/ [Accessed 16 Apr. 2017]. Tomilson, S. Shifts in Cost Curves. [Online] Economics. Available at: https://college.cengage.com/economics/0538797274_mceachern/student/lecture/8590.pdf [Accessed 16 Apr. 2017].