Fuel Ethanol Subsidies and Farm Price Support
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Bruce Gardner
Ethanol subsidies are well established in U.S. policy and have high priority in corn growers' political agenda. This paper develops a vertical market model of ethanol, byproducts, and corn which is used to analyze whether corn growers would prefer the government's subsidy dollar to be spent directly on corn subsidies (though deficiency payments) rather than on a subsidy on ethanol made from corn. Because the subsidy dollar has to be shared with ethanol manufacturers under the ethanol subsidy, it is to be expected, and the model confirms, that a dollar spent on a direct corn subsidy increases corn growers' producer surplus more than an a dollar spent on an ethanol subsidy under many plausible values of the relevant parameters. But there are equally plausible parameter values under which the ethanol subsidy is preferred by corn growers. The economics of this result turn mainly on the price discrimination an ethanol subsidy creates between ethanol and corn used for feed and export purposes, reducing the buyers' price of ethanol and byproducts but increasing the price of corn fed and exported. This enables producers of corn and ethanol to increase their joint producer surpluses above the total value of subsidies paid. The paper also analyzes the social cost (deadweight loss) of these subsidies, and finds the ethanol subsidy to generate deadweight losses likely to be in the billions of dollars annually.
©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
Articles in the same Issue
- Article
- Explorations in Biofuels Economics, Policy, and History: Introduction to the Special Issue
- Policy Alternatives for the Future Biofuels Industry
- Ethanol: No Free Lunch
- Fuel Ethanol Subsidies and Farm Price Support
- Estimating the Welfare Effects of U.S. Distortions in the Ethanol Market Using a Partial Equilibrium Trade Model
- Ethanol Expansion in the Food versus Fuel Debate: How Will Developing Countries Fare?
- European Union Policy on Bioenergy and the Role of Sustainability Criteria and Certification Systems
- Biofuels Policies in Asian Countries: Impact of the Expanded Biofuels Programs on World Agricultural Markets
- Potential Land Use Implications of a Global Biofuels Industry
- Technical and Financial Feasibility Analysis of Distributed Bioprocessing Using Regional Biomass Pre-Processing Centers
- Fueling the Automobile: An Economic Exploration of Early Adoption of Gasoline over Ethanol
Articles in the same Issue
- Article
- Explorations in Biofuels Economics, Policy, and History: Introduction to the Special Issue
- Policy Alternatives for the Future Biofuels Industry
- Ethanol: No Free Lunch
- Fuel Ethanol Subsidies and Farm Price Support
- Estimating the Welfare Effects of U.S. Distortions in the Ethanol Market Using a Partial Equilibrium Trade Model
- Ethanol Expansion in the Food versus Fuel Debate: How Will Developing Countries Fare?
- European Union Policy on Bioenergy and the Role of Sustainability Criteria and Certification Systems
- Biofuels Policies in Asian Countries: Impact of the Expanded Biofuels Programs on World Agricultural Markets
- Potential Land Use Implications of a Global Biofuels Industry
- Technical and Financial Feasibility Analysis of Distributed Bioprocessing Using Regional Biomass Pre-Processing Centers
- Fueling the Automobile: An Economic Exploration of Early Adoption of Gasoline over Ethanol
