Demand, a good or service increases, its

Demand, supply, and externalities are fundamental economic concepts that governments and individuals alike can apply to make informed decisions on what and what not to produce.In an article by The Guardian, a study shows that the demand for biofuels is increasing global food prices, with prices being the amount of money that must be paid to acquire a given product.Demand is a curve that displays the quantity of a good or service that consumers are willing to purchase at a given price in a specific time period. Supply is a curve that shows the amount of a good or service that producers are willing to supply to the market at a given price and at a specific time. Although, at first glance, it seems as if an increase in demand for biofuels resulting in an increase in food prices contradicts the law of demand, which states that as the demand of a good or service increases, its price decreases, it is quite the contrary. In the graphs shown below, the relationship between biofuels and food crops is depicted.As demand for biofuel increases due to government regulations (Bd1 to Bd2), the supply for biofuels (Bs1 to Bs2) also increases due to government policies, according to the article; “There has been a surge in the production of biofuels in Europe and the US since the early 2000s, backed by policies designed to cut use of fossil fuels, such as the first EU biofuel directive in 2003.” As a result of the biofuel market’s supply and demand both increasing, market equilibrium also increases. In this case, market equilibrium is the price at which demand and supply are equal, achieving maximum efficiency. According to the law of supply, which states that as the supply for a good or service increases, the price must increase as well, the supply of food crops will increase when the supply of biofuels increases. This is due to food crops being a capital good for biofuels, with a capital good being a good used for the production of another. Because it is necessary for food crops to be supplied in order to produce biofuels, it is only natural that the supply for food crops to increase as the supply for biofuels increases.Finally, in accordance with the law of supply, as the supply for these food crops increases, the resulting price of foods must increase as well. This demonstrates the laws of supply and demand as changes to biofuel’s supply and demand result in an increase in a related capital good; food crops.In addition to supply and demand being demonstrated in this article, negative externalities of production is also a significant theory displayed in this article. Negative externalities of production are simply costs that third parties must suffer from as a result of a transaction between producers and consumers. And as the supply for biofuels increases as a result of government regulations, food prices begin to increase. Furthermore, the use of certain food crops in the production of biofuels actually create worse emissions than the fossil fuels that biofuels were meant to replace. The marginal social cost (MSC), which includes the price increase of foods as well as worse carbon emissions, is much higher that the marginal private costs (MPC) of firms. MSC is the cost provoked by the production or use of a good or service, including costs to the whole of society and producers themselves. On the other hand, MPC are the costs suffered by only the producer for the making of a certain good or service. MSB, marginal social benefit, is the total benefit society receives. As a result of MSC being higher than MPC, welfare loss occurs. This is what society pays as a result of allocative inefficiency of resources caused by negative production externalities.However, as with nearly all problems, negative externalities of productions can be solved. In this article, this is displayed through the UK’s legislation, which is simply a law being enacted, to “cap its use of food-based biofuels at 4% of UK road fuel next year, dropping to 2% by 2032.” This demonstration of legislation as a solution to negative production externalities is a direct linkage to microeconomics.With precise inspection of this article, the fundamental principles of supply, demand, and negative externalities of production can be applied to allow governments to decide the fate of food-based biofuels and ultimately the well-being of their citizens with food prices on the rise.