1. Are there any negative externalities associated with biofuel production?

Yes, because of nitrogen fertilisers there is more greenhouse gases, according to Crutzen. Unanticipated negative externality of the biofuel production is increasing the price of food, by diverting the wheat and corn production from production of food. The negative externality resulting from it is the

Moreover, another negative externality of producing biofuel, is the fact that given the tax relief for the farmers producing it, and the tax relief when selling it there might occur a situation in which more fuel is used than is produced, which is an obvious misallocation of resources.

Moreover, According to Grunwald's Time magazine cover story, biofuels are contributing to the deforestation of the Amazon rainforest. The chain of unintended consequences is as follows: 1) subsidies for biofuels lead some U.S. soybean farmers to switch to corn; 2) fewer soybeans lead to higher soybean prices; 3) higher soybean prices lead Brazilian soybean farmers to expand, displacing cattle ranchers; and 4) cattle ranchers clear new pastures out of the Amazon.

2. Are there any positive externalities associated with biofuel production?

There are according to European politicians. The main positive externality is the fact that during production of the biofuel, during the vegetation process of plant from which biofuel is going to be produced leads to decrease in the amount of CO2 in the atmosphere.

3. Can increased transport in the UK be met by usage of ‘green’ fuels?

Yes, to some extent. Production of the biofuel from the sugar beet uses less fuel than it produces, therefore it could meet the increasing demand for fuel.

4. Has the market intervention in the market for biofuels led to more problems than it solved?

Most likely it led to more problems that it solved. It was most likely for one of the reasons for the increase in the food prices. This on its own was a huge, global problem, resulting in riots, hunger, and in many examples death from starvation.

As mentioned, it also resulted in increasing deforestation, which most likely outweighs the positive externality which was supposed to be the increase CO2 consuming plants.

The fact that the governments are subsidising the inefficient wheat and maize, instead of subsidising efficient in producing biofuel sugar beet is another example of government failure.

5. Explain the difference between carbon tax and carbon trading scheme.

Carbon trading scheme is a system in which polluter to be allowed to pollute – emit CO2 to the atmosphere has to buy a pollution permit that is going to cover the expenses imposed on the third party. If a producer reduces emission of CO2 under a certain level, he is allowed to sell the pollution permits that he did not use.

Carbon tax is a direct tax imposed on the producer. The amount of tax paid by the polluter depends on the amount of CO2 he produces.

6. Is the European carbon emission trading scheme an effective way of correcting for environmental market failure?

It is, as long as pollution permits are expensive enough. Because of the recession, there great reduction in manufacturing. This leads to situation in which the pollution permits are so cheap, that there is no incentive to reduce the negative externality.

7. What is the link between biofuel production and global food price inflation?

The link is that there is a joint supply of biofuel and food. For production of both the same resources are used. Therefore, if the demand for one of the products is rising, the price of other is also rising. As there was an increase in the demand for biofuel, the price of food increased, because of the reduced supply of food.

8. Identify from the various extracts in the stimulus materials possible examples of government failure

Examples of government failures from the extracts:

1. the failure of the Russian government to increase production of food
2. Other example of government failure was subsidising biofuel