Biofuel subsidies: an open-economy analysis
AbstractWe present a general equilibrium analysis of biofuel subsidies in an open-economy context. In the small-country case, when a Pigouvian tax on conventional fuels such as crude is in place, the optimal biofuel subsidy is zero. When the tax on crude is not available as a policy option, however, a second-best biofuel subsidy (or tax) is optimal. In the large-country case, the optimal tax on crude departs from its standard Pigouvian level and a biofuel subsidy is optimal. A biofuel subsidy spurs global demand for food and confers a terms-of-trade benefit to the food-exporting nation. This might encourage the food-exporting nation to use a subsidy even if it raises global crude use. The food importer has no such incentive for subsidization. Terms-of-trade effects wash out between trading nations; hence, any policy intervention by the two trading nations that raises crude use must be jointly suboptimal.
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Bibliographic InfoPaper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2009-053.
Date of creation: 2009
Date of revision:
Other versions of this item:
- F1 - International Economics - - Trade
- H2 - Public Economics - - Taxation, Subsidies, and Revenue
- O1 - Economic Development, Technological Change, and Growth - - Economic Development
This paper has been announced in the following NEP Reports:
- NEP-AGR-2009-10-31 (Agricultural Economics)
- NEP-ALL-2009-10-31 (All new papers)
- NEP-ENE-2009-10-31 (Energy Economics)
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