2. Biofuels, such as corn-based ethanol, are having detrimental effects on the environment, with increased deforestation, stemming from more land being used to grow fuel inputs, contributing to global warming. 3. The diversion of corn and other crops from food to fuel is contributing to rising food prices and an increase in world hunger. C. Ford Runge and Benjamin Senauer wrote in Foreign Affairs that even small increases in prices of food staples have severe consequences on the very poor of the world, and “Filling the 25-gallon tank of an SUV with pure ethanol requires over 450 pounds of corn—which contains enough calories to feed one person for a year.” Some of these criticisms may be contested as exaggerated: Will the ratio of energy-in to energy-out improve as new technologies emerge for producing ethanol? Did not other factors, such as weather and rising food demand worldwide, contribute to higher grain prices? Nonetheless, it is clear that corn- based ethanol is no free lunch. It is also clear that the end of government support for corn is nowhere to be seen. Sources: Alexei Barrionuevo, “Mountains of Corn and a Sea of Farm Subsidies,” New York Times , November 9, 2005, online version; David Freddoso, “Children of the Corn,” National Review Online, May 6, 2008; C. Ford Runge and Benjamin Senauer, “How Biofuels Could Starve the Poor,” Foreign Affairs , May/June 2007, online version; Michael Grunwald, “The Clean Energy Scam,” Time 171:14 (April 7, 2008): 40–45. Chapter 4 Applications of Demand and Supply 4.2 Government Intervention in Market Prices: Price Floors and Price Ceilings 167
ANSWER TO TRY IT! PROBLEM A minimum wage ( W min ) that is set above the equilibrium wage would create a surplus of unskilled labor equal to ( L 2 - L 1 ). That is, L 2 units of unskilled labor are offered at the minimum wage, but companies only want to use L 1 units at that wage. Because unskilled workers are a substitute for a skilled workers, forcing the price of unskilled workers higher would increase the demand for skilled labor and thus increase their wages. Chapter 4 Applications of Demand and Supply 4.2 Government Intervention in Market Prices: Price Floors and Price Ceilings 168
4.3 The Market for Health-Care Services LEARNING OBJECTIVE 1. Use the model of demand and supply to explain the effects of third- party payers on the health-care market and on health-care spending. There has been much discussion over the past three decades about the health-care problem in the United States. Much of this discussion has focused on rising spending for health care. In this section, we will apply the model of demand and supply to health care to see what we can learn about some of the reasons behind rising spending in this important sector of the economy.
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