Monday, January 29, 2007

The Second Best Theory of Tortilla Prices

I don't think that Tim Haab at Environmental Economics subscribes to the Econ-Atrocities, but by happy coincidence he's written a blog post that would fit perfectly in the series. His topic is the Mexican government's response to serious inflation in the cost of tortillas, which are a primary staple of the Mexican diet, and poor Mexicans (of which there are plenty) are getting hit by these price hikes like a punch to the gut. Should the Mexican government pursue a policy of price caps for tortialls? The "Theory of the Second Best" offers an interesting angle of analysis. I'll let Tim explain it himself, but as a teaser here's a bit of his conclusion:
If the price cap is a response to another inefficient policy, then the price cap may actually improve efficiency. The first best solution would be to remove the policies creating the inefficiently high corn prices. The second best solution might be to create a new policy to counteract the effects of bad policy. That's the Theory of Second Best.

This all makes best sense as part of his full post, so go read it (it's not long, so it won't hurt).


At 6:02 AM, Blogger jte said...

As a followup, the NYTimes reports today on large protests in Mexico over rising food prices.

"...But the tortilla price spiral appeared to come as a surprise. Although Mr. Calderón moved quickly, announcing a pact on Jan. 18 to freeze prices, the problem has not been resolved.

Even with the pact, the news reports focused on the fact that the price ceiling for the tortillas of about 35 cents a pound was about 40 percent higher than the price three months earlier and contrasted that with the 4 percent increase in the minimum wage, which is still less than $5 a day.

But because fewer than 10 percent of tortilla producers signed on to the agreement, the government had little power over those who did not. In some areas, prices have risen to 45 cents a pound. There is little more that Mr. Calderón can do to contain prices without huge expenditures for subsidies. Most analysts agree that the main cause of the increase has been a spike in corn prices in the United States, as the demand for corn to produce ethanol has jumped..."

It's also interesting to note the apparent connection to ethanol as the source of rising corn prices. Further evidence that biofuels, while necessary as part of reducing the harm of global warming, are not panacaeas and cannot replace the need to reduce overall fuel consumption.


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