Tuesday, January 10, 2012

Food demand and price volatility

In Mankiw's Principles of Microeconomics textbook, he poses students the following paraphrased question: Your friend notes that food has a very high demand elasticity and comments that it would be a good source of tax revenue. In what sense is your friend right about it being a "good" tax and in what sense is the tax "not good"?

Most students successfully answered that it was "good" in the sense that it would generate a lot of tax revenue, (missed the part of it being "good" in the sense that there would be very little deadweight loss), and that it is "not good" in the sense that it will hurt the poor who may not have enough to eat more than the wealthy.

FAO in its new High Level Panel of Experts report on food price volatility takes that excellent point one step further in rigor. As societies and individuals become wealthier, their demand for food becomes less sensitive to price (less elastic). This means when any price change occurs, it is the poorer consumers who will change their consumption pattern most. When all food prices increase and it isn't because of an increase in demand*, the poor have less to eat while the non-poor are still able to have enough food.

Food price volatility increases the inequality of food consumption. They also show that biofuel policies increase the inequality of food consumption even further, shaping a food system designed to hurt the poor more when food prices rise.

* - Never reason from a price change. Why did the price increase? If the poor are eating more and that leads to a price change, they may still be better off.

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