Fuel Ethanol Subsidies and Farm Price Support

Bruce Gardner

Journal of Agricultural & Food Industrial Organization, 2007, vol. 5, issue 2, 22

Abstract: 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.

Keywords: ethanol; subsidies; bioenergy; biofuels (search for similar items in EconPapers)
Date: 2007
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (49)

Downloads: (external link)
https://doi.org/10.2202/1542-0485.1188 (text/html)
For access to full text, subscription to the journal or payment for the individual article is required.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bpj:bjafio:v:5:y:2007:i:2:n:4

Ordering information: This journal article can be ordered from
https://www.degruyter.com/journal/key/jafio/html

DOI: 10.2202/1542-0485.1188

Access Statistics for this article

Journal of Agricultural & Food Industrial Organization is currently edited by Azzeddine Azzam

More articles in Journal of Agricultural & Food Industrial Organization from De Gruyter
Bibliographic data for series maintained by Peter Golla ().