Soil heterogeneity, agricultural supply and land-use change: an application to biofuels production

Biofuels policies (blend mandate or tax credit) have impacts on food and energy prices, and on land-use. The magnitude of these effects depends on the market response to price, and thus on the agricultural supply curve, which, in turn, depends on the land availability (quantity and agronomic quality). To understand these relationship beyond marginal analysis, we develop a theoretical framework with an explicit representation of land heterogeneity. The elasticity of supply curve is shown to be non-constant. This influences the welfare economics of biofuel policies. This is due to the availability of new land of marginal quality. Biofuels policies have different impacts in different countries, depending on both their global land endowment and the position of the equilibrium on the non linear agricultural supply curve. Knowing this heterogeneity helps to refine welfare analysis.