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The demand for ethanol as a gasoline substitute

  • Anderson, Soren T.

This paper estimates household preferences for ethanol (E85) as a gasoline (E10) substitute. I develop a theoretical model linking the shape of the ethanol demand curve to the underlying distribution among households of willingness to pay for ethanol. I estimate the model using instrumental variables techniques and data from many retail fueling stations. I find that a $0.10-per-gallon increase in ethanol's price relative to gasoline leads to a 12–16% decrease in the quantity of ethanol demanded. My findings imply that preferences for ethanol are heterogeneous and that a substantial fraction of households are willing to pay a premium for the fuel. This reduces substantially the simulated efficiency cost of an ethanol content standard, since some households choose ethanol without large subsidies, mitigating deadweight losses.

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Article provided by Elsevier in its journal Journal of Environmental Economics and Management.

Volume (Year): 63 (2012)
Issue (Month): 2 ()
Pages: 151-168

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Handle: RePEc:eee:jeeman:v:63:y:2012:i:2:p:151-168
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622870

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