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Fuel Ethanol Subsidies and Farm Price Support

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  • Gardner Bruce

    (University of Maryland, College Park)

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.

Suggested Citation

  • Gardner Bruce, 2007. "Fuel Ethanol Subsidies and Farm Price Support," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 5(2), pages 1-22, December.
    • Handle: RePEc:bpj:bjafio:v:5:y:2007:i:2:n:4
    DOI: 10.2202/1542-0485.1188
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    References listed on IDEAS

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    1. Eidman, Vernon R., 2007. "Economic Parameters for Corn Ethanol and Biodiesel Production," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 39(2), pages 1-12, August.
    2. Miranowski, John, 2007. "Biofuel Incentives and the Energy Title of the 2007 Farm Bill," Staff General Research Papers Archive 12821, Iowa State University, Department of Economics.
    3. Miranowski, John A, 2007. "Biofuel Incentives and the Energy Title of the 2007 Farm Bill," ISU General Staff Papers 200705170700001565, Iowa State University, Department of Economics.
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