Question

Opportunity Costs of Using Corn for Ethanol Production

Objectives · Determine opportunity cost · Explain the factors which lead to expansion of production possibilities and economic growth · Explain the components of an efficient allocation · Describe obstacles to efficiency

Answer 1

Opportunity cost is the cost of giving up the next best alternative to use the resources for current need.

Corn is used for feeding livestock and people in the developing countries, for food and beverage and for producing ethanol. If the corn is used for producing ethanol, it implies that we are giving up the opportunity to feed the livestock and humans and for producing corn related food and beverage Hence these would be the opportunity costs for using corn to produce ethanol.

Determining opportunity cost : opportunity cost is cost of giving up the next best alternative to produce current good. It is determine by the ratio of what we are sacrificing to what is being gained.

Expansion of production possibilities and economic growth could be due to factors like technological advancements. When there is availability of better technology, the more of all the goods could be produced due to more efficiency.

Or an increase in the factors of production like land , labour etc could increase the economic growth. Better utilisation of currnet technology, less wastage etc could increase the production possibilities.

Components of efficient allocation:

Efficient allocation is when the resources are used in a way that gives the people maximum utility. Also in case of efficient allocation , there is no possible allocation which can make someone better off without making someone else worse off.

The three components of economic efficiency are

Technical, allocative and dynamic efficiency.

Technical or productive is when the goods are being produced at least cost.

Allocative is when people are getting most benefits from the current allocation ( put to best use)

Dynamic efficiency is when the firms upgrade and change according to the tastes and preferences of the consumers.

Obstacles to efficiency: There are obstacles to efficiency due to government intervention:

Price ceilings , subsidies, taxes , import tariffs etc distort the market mechanism and there is inefficient allocation of resources. Eg: people below a certain income getting food at subsided rates and not depending on market for the equilibrium is obstacle to efficiency but required for a just economy.

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